As filed with the Securities and Exchange Commission on February 3, 1999
Registration No. 333-63697
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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Paragon Auto Receivables Corporation
as Seller to the Trusts described herein
(Exact name of Registrant as specified in its charter)
Delaware 27405 PUERTA REAL, 33-0653501
(State or other Suite 200 (I.R.S. Employer
jurisdiction of MISSION VIEJO, Identification No.)
incorporation or CALIFORNIA 92691
organization) (949) 348-8707
(Address, including zip code, and
telephone number, including area
code, of Registrant's principal
executive offices)
Nancy C. Ferguson, Esq.
General Counsel
Paragon Acceptance Corporation
200 South Hanley, Suite 800
Clayton, Missouri 63105
(314) 721-0012
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Copies to:
Elizabeth A. Raymond, Esq.
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
(312) 782-0600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From
time to time after this Registration Statement becomes effective as
determined by market conditions.
-----------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box: [ ]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box: |X|
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
===============================================================================
Proposed Proposed
maximum maximum
Title of each offering aggregate
class of securities Amount to be price per offering Amount of
to be registered registered unit(1) price (1) registration fee
- - -----------------------------------------------------------------------------
Asset Backed Notes
and Certificates..... $400,000,000 100% $400,000,000 $111,217 (1)
===============================================================================
1) $295 was previously paid, based upon the former rate of $295 per
$1,000,000. The remaining $110,922 is being remitted herewith.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.
<PAGE>
INTRODUCTORY STATEMENT
This Registration Statement contains (i) the form of Prospectus
relating to the offering of a series of Asset Backed Notes and/or
Asset Backed Certificates by various Paragon Auto Receivables
Trusts created from time to time by Paragon Auto Receivables
Corporation, and (ii) two forms of Prospectus Supplement relating
to offerings of particular series of Asset Backed Certificates
(such form of Prospectus Supplement is identified on the outside
front cover page thereof as the "Preliminary Grantor Trust
Prospectus Supplement Form") or of Asset Backed Notes and Asset
Backed Certificates (such form of Prospectus Supplement is
identified on the outside front cover page thereof as the
"Preliminary Owner Trust Prospectus Supplement Form" and, together
with the form of Grantor Trust Prospectus Supplement, the
"Prospectus Supplement Forms") described therein. Each Prospectus
Supplement Form relates only to the securities described therein.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS
SUBJECT TO COMPLETION, DATED ___________, 1998
PARAGON AUTO RECEIVABLES TRUSTS
Asset Backed Notes
Asset Backed Certificates
Paragon Auto Receivables Corporation
Seller
Paragon Acceptance Corporation
Servicer
The Asset Backed Notes (the "Notes") and the Asset Backed
Certificates (the "Certificates" and, together with the Notes, the
"Securities") described herein may be sold from time to time in one or more
series, in amounts, at prices and on terms to be determined at the time of
sale and to be set forth in a supplement to this Prospectus (a "Prospectus
Supplement"). Each series of Securities, which may include one or more
classes of Notes or one or more classes of Certificates (or both), will be
issued by a trust to be formed on or before the issuance date for that
series (each, a "Trust"). Each Trust will be formed pursuant to either a
Trust Agreement (as amended and supplemented from time to time, a "Trust
Agreement") to be entered into between Paragon Auto Receivables
Corporation, a Delaware corporation, as seller (the "Seller"), Paragon
Acceptance Corporation ("Paragon" or, in its capacity as servicer, the
"Servicer"), and the trustee specified in the related Prospectus Supplement
(the "Trustee") or a Pooling and Servicing Agreement to be entered into
between the Trustee, the Seller and the Servicer. If a series of Securities
includes Notes, these Notes will be issued and secured pursuant to an
Indenture (as amended and supplemented from time to time, an "Indenture")
between the Trust and the indenture trustee specified in the related
Prospectus Supplement (the "Indenture Trustee") and will represent
indebtedness of the related Trust. The Certificates of a series will
represent fractional undivided interests in the related Trust. Capitalized
terms used in this Prospectus are defined on the pages indicated in the
"Index of Terms" on page 60 of this Prospectus. The property of each Trust
will include a pool of motor vehicle retail installment contracts (the
"Receivables") secured by new or used automobiles, light duty trucks and
sports utility vehicles (the "Financed Vehicles"), all moneys due or
received thereunder or with respect thereto after the applicable Cutoff
Date set forth in the related Prospectus Supplement, security interests in
the vehicles financed, any proceeds from claims on insurance policies with
respect to the Financed Vehicles, rights under dealer agreements, rights
with respect to deposit accounts in which collections are held or that
serve as credit enhancement, any other credit enhancements, and proceeds of
the foregoing, all as described herein and in the related Prospectus
Supplement. See "The Trusts."
(Continued on next page)
<PAGE>
Prospective investors should consider the "Risk Factors"
set forth at page 13 herein, which discusses material
risks involved with an investment in the Securities.
ANY NOTES OF A SERIES REPRESENT OBLIGATIONS OF, AND THE CERTIFICATES OF A
SERIES REPRESENT BENEFICIAL INTERESTS IN, THE RELATED TRUST ONLY AND DO NOT
REPRESENT OBLIGATIONS OF OR INTERESTS IN PARAGON AUTO RECEIVABLES
CORPORATION, PARAGON ACCEPTANCE CORPORATION OR ANY OF THEIR AFFILIATES.
NONE OF THE NOTES, THE CERTIFICATES OR THE RECEIVABLES ARE GUARANTEED OR
INSURED BY, PARAGON AUTO RECEIVABLES CORPORATION, PARAGON ACCEPTANCE
CORPORATION OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus may not be used to consummate sales of Securities offered
hereby unless accompanied by a Prospectus Supplement.
The date of this Prospectus is _______ __, 1998.
1
<PAGE>
(Continued from previous page)
The related Prospectus Supplement will specify which class or
classes of Notes, if any, and which class or classes of Certificates, if
any, of the related series are being offered thereby. Each class of
Securities of any series, other than any Strip Notes and Strip
Certificates, will represent the right to receive a specified amount of
payments of principal and interest on the related Receivables, at the
rates, on the dates and in the manner described herein and in the related
Prospectus Supplement. See "Description of the Notes," "Description of the
Certificates" and "Description of the Securities" herein and in the related
Prospectus Supplement. If a series includes multiple classes of Securities,
the rights of one or more classes of Securities to receive payments may be
senior, equal to or subordinate to the rights of one or more of the other
classes of such series. Distributions on Certificates of a series may be
subordinated in priority to payments due on any related Notes or any other
Certificates to the extent described herein and in the related Prospectus
Supplement. See "Risk Factors--Risks Related to Subordination" herein and
in the related Prospectus Supplement.
A series may include one or more classes of Notes and/or
Certificates which differ as to the timing and priority of payment,
interest rate or amount of distributions in respect of principal or
interest or both. A series may include one or more classes of Notes or
Certificates entitled to distributions in respect of principal with
disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no distributions in
respect of principal. The rate of payment in respect of the principal of
any class of Notes and distributions in respect of the Certificate Balance
(as specified in the related Prospectus Supplement, the "Certificate
Balance") of any class of the Certificates will depend on the priority of
payment of such class and the rate and timing of payments (including
prepayments, defaults, liquidations and repurchases of Receivables) on the
related Receivables. A rate of payment lower or higher than that
anticipated may affect the weighted average life of each class of
Securities in the manner described herein and in the related Prospectus
Supplement. See "Weighted Average Life of the Securities."
AVAILABLE INFORMATION
The Seller, as originator of each Trust, has filed with the
Securities and Exchange Commission (the "Commission") a Registration
Statement (together with all amendments and exhibits thereto, referred to
herein as the "Registration Statement") under the Securities Act of 1933,
as amended (the "Securities Act"), with respect to the Notes and/or the
Certificates offered pursuant to this Prospectus. For further information,
reference is made to the Registration Statement, which may be inspected and
copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549; and at the Commission's
regional offices at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of the Registration Statement may be obtained
from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, the
Commission maintains a public access site on the Internet through the World
Wide Web at which site reports, information statements and other
information, including all electronic filings, may be viewed. The Internet
address of such World Wide Web site is http://www.sec.gov.
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Seller, as originator of any Trust,
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), after the date of this
Prospectus and prior to the termination of the offering of the Securities
shall be deemed to be incorporated by reference in this Prospectus or in
any related Prospectus Supplement. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus. See "Certain Information Regarding
the Securities--Reports to Securityholders."
The Seller will provide without charge to each person, including
any beneficial owner of Securities, to whom a copy of this Prospectus is
delivered, on the written or oral request of such person, a copy of any or
all of the documents incorporated herein or in any related Prospectus
Supplement by reference, except the exhibits to such documents (unless such
exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to the Seller, in care of
Paragon Acceptance Corporation, 200 South Hanley, Suite 800, Clayton,
Missouri 63105, Attention: General Counsel (Telephone: (314) 721-0012). The
Servicer will file with respect to each Trust such periodic reports as are
required by the Exchange Act.
2
<PAGE>
RISK FACTORS
The Limited Liquidity of the Securities May Make it Difficult to Resell Them
The Underwriters for an offering of Securities (as defined in the related
Prospectus Supplement,"Underwriters") may assist in resales of the Securities
but they are not required to do so. A secondary market for any Securities may
not develop. If a secondary market does develop, it might not continue or it
might not be sufficiently liquid to allow you to resell any of your
Securities. In addition, if the Securities are traded after their initial
issuance, they may trade at a discount from their initial offering price,
depending on prevailing interest rates, the market for similar securities,
the financial condition and prospects of the Trust and other factors beyond
the control of the Issuer, including general economic conditions.
Increases in Delinquencies and Losses on the Receivables May Cause Payment
Reductions or Delays
Paragon began purchasing motor vehicle retail installment contracts
in August 1996. Although Paragon has calculated and presented its net loss
experience with respect to its serviced portfolio in this Prospectus and
the related Prospectus Supplement, there can be no assurance that the
information presented will reflect actual experience with respect to the
Receivables. In addition, there can be no assurance that the future
delinquency or loss experience of a Trust with respect to the Receivables
will be better or worse than that set forth herein with respect to
Paragon's serviced portfolio. It is likely, however, that delinquencies and
losses will increase in the portfolio as the Receivables become more
seasoned. The credit enhancement for each Trust will be designed to protect
Securityholders against such increases in delinquencies and losses. If,
however, any such increase is greater than anticipated, delays in payments
of collections of the Receivables could occur or reductions in the amount
of payments to Securityholders could result. See "The Receivables" in the
related Prospectus Supplement.
Securityholders Bear Reinvestment Risk and Other Interest Rate Risks if
Receivables Are Prepaid
Reinvestment Risks from Prepayments. All the Receivables are
prepayable at any time without penalty (or with only a nominal penalty) to
the Obligor. For this purpose the term "prepayments" includes prepayments
in full, partial prepayments and liquidations due to default, receipts of
proceeds from claims on any repossession loss, physical damage, credit life
and accident and health insurance policies and purchases by dealers (the
"Dealers") under their respective dealer agreements (each, a "Dealer
Agreement") or dealer assignments (each, a "Dealer Assignment"). In
addition, the Seller and the Servicer may be required to repurchase
Receivables from the Trust if specified representations or covenants made
by them are breached. The Servicer also has the right to purchase all
remaining Receivables and other Trust property from a Trust pursuant to its
optional repurchase right. See "Description of the Transfer and Servicing
Agreements--Sale and Assignment of Receivables," "--Servicing Procedures"
and "--Termination." Each such prepayment, repurchase or purchase will
shorten the average life of the related Securities.
Prepayment rates of Receivables may be influenced by a variety of
economic, social and other factors, and cannot be predicted with any
assurance. For example, decreases in interest rates and the fact that the
Obligor may not sell or transfer the Financed Vehicle without the payment
in full of the related Receivable may affect the rate of prepayment. If
prepayments occur after a decline in interest rates, you may be required to
reinvest your funds at a return lower than the applicable interest rate on
a class of Notes (the "Interest Rate") or the applicable rate of interest
on a class of Certificates (the "Certificate Rate")). You will bear all
reinvestment risk resulting from a faster or slower rate of prepayment of
Receivables.
<PAGE>
Risks Associated with Securities Purchased at a Discount or Premium.
Holders of Securities should consider, in the case of any Securities
purchased at a discount, the risk that a slower than anticipated rate of
principal payments on the Receivables will result in an actual yield (i.e.,
the effective interest rate) that is less than the anticipated yield. In
the case of any Securities purchased at a premium, Holders of Securities
should consider the risk that a faster than anticipated rate of principal
payments on the Receivables will result in an actual yield that is less
than the anticipated yield. See "--Reinvestment Risks from Prepayments."
Risks Associated with Yield Sensitivity of the Strip Securities. The yield
to maturity of any Strip Securities will be extremely sensitive to the
prepayment and default experience on the Receivables, which may fluctuate
significantly from time to time. See "--Reinvestment Risks from
Prepayments." Holders of any Strip Securities entitled to principal
payments with disproportionately small, nominal or no interest payments
should consider the risk that a slower than anticipated rate of payments on
the Receivables will result in an actual yield that is less than the
anticipated yield. Holders of Strip Securities entitled to interest
payments with disproportionately small, nominal or no principal payments
should consider the risk that a faster than anticipated rate of payments on
the Receivables will result in an actual yield that is less than the
anticipated yields. Prospective investors in Strip Securities should fully
consider the risk that an extremely rapid rate of principal prepayments
could result in the failure of investors in the Strip Securities entitled
to disproportionately small, nominal or no principal payments to recoup
their initial investment.
Servicing Errors Due to Servicer's Failure to Segregate Receivable Files May
Cause Payment Reductions or Delays
The Seller will cause financing statements to be filed with the
appropriate governmental authorities to perfect the interest of the related
Trust in its purchase of Receivables from the Seller and to perfect the
interest of the Seller in its purchase of Receivables from the Paragon in
accordance with the UCC in effect in the relevant jurisdiction. If so
specified in the related Prospectus Supplement, the Servicer will hold the
Receivables, either directly or through subservicers, as custodian for the
applicable Trustee following the sale and assignment of the Receivables to
the related Trust. The Receivables will not be segregated, stamped or
otherwise marked to indicate that they have been sold to the related Trust.
The Seller believes that it is customary for Receivables to not be
segregated or stamped or otherwise marked in connection with asset
securitizations of the type contemplated hereby and in other types of
receivables financings where the parent company of the transferor has
credit ratings that are investment grade or better and servicing is
retained by the transferor. If through inadvertence or otherwise (for
example, if Paragon or the Seller were to sell or grant a security interest
in Receivables in violation of the applicable Transfer and Servicing
Agreements), another party purchases (or takes a security interest in) the
Receivables for new value in the ordinary course of business and takes
possession of the Receivables without actual knowledge of the related
Trust's interest, the purchaser (or secured party) will acquire an interest
in the Receivables superior to the interest of the related Trust. Under
such circumstances, there is a risk that the Trust would not be able to
realize some or all of the cash flow from such Receivable. Although Paragon
or the Seller would be liable to the Trust in that event, if Paragon or the
Seller became insolvent, holders of Securities could suffer losses.
<PAGE>
Unenforceability of the Trust's Security Interests in Financed Vehicles
Because Certificates of Title Will Not Be Amended May Cause Payment
Reductions or Delays
In connection with the sale of Receivables by Paragon to the Seller
and by the Seller to a Trust, security interests in the Financed Vehicles
securing such Receivables will be assigned by Paragon to the Seller and by
the Seller to such Trust simultaneously with the sale of such Receivables
by Paragon to the Seller and by the Seller to such Trust. Due to
administrative burden and expense (i.e., fees payable to state motor
vehicle departments ranging up to approximately forty dollars per vehicle
and related paperwork), the certificates of title to the Financed Vehicles
will not be amended to reflect the assignments to the Seller or to the
Trust. In the absence of such amendments, the Seller and such Trust may not
have a perfected security interest in the Financed Vehicles securing the
Receivables in some states. The Seller will be obligated to repurchase any
Receivable sold to such Trust as to which the Seller has breached its
representation that it has a perfected security interest in the Financed
Vehicle securing such Receivable as of the date such Receivable is
transferred to such Trust, if such breach shall materially and adversely
affect the interest of such Trust in such Receivable and if a breach of
such representation shall not have been cured by the last day of the month
that includes the sixtieth day (or, if the Seller elects, earlier)
following the discovery by or notice to the Seller of such breach. If such
Trust does not have a perfected security interest in a Financed Vehicle,
its ability to realize on such Financed Vehicle in the event of a default
may be adversely affected, which could result in delays in payments on the
related Notes (if any) and Certificates and possible reductions in the
amount of those payments. Paragon will be obligated, pursuant to the
applicable Purchase Agreement, to repurchase from the Seller any Receivable
sold by it thereunder that the Seller has repurchased as a result of such a
breach. The Seller will assign its rights under each Purchase Agreement to
the related Trust. The Seller believes that it is customary for
certificates of title or ownership to not be endorsed or amended in
connection with asset securitizations of the type contemplated hereby.
4
<PAGE>
Non-Priority of the Trust's Security Interests in Financed Vehicles May Cause
Payment Reductions or Delays
To the extent the security interest in the Financed Vehicles is
perfected, such Trust will have a prior claim over subsequent purchasers of
such Financed Vehicles and holders of subsequently perfected security
interests. However, as against liens for repairs of Financed Vehicles or
for taxes unpaid by an Obligor under a Receivable, or through fraud or
negligence, such Trust could lose the priority of its security interest or
its security interest in a Financed Vehicle. Loss of priority could result
in delays in payments on the related Notes (if any) and Certificates and
possible reductions in the amount of those payments. Neither the Seller nor
the Servicer will have an obligation to repurchase a Receivable as to which
any of the aforementioned occurrences result in such Trust's losing the
priority of its security interest or its security interest in such Financed
Vehicle after the date such security interest was conveyed to such Trust.
See "Certain Legal Aspects of the Receivables--Security Interest in
Vehicles."
Insolvency of Paragon or the Seller May Cause Payment Reductions or Delays
The Seller has taken steps in structuring the transactions described
herein and in the related Prospectus Supplement that are intended to ensure
that the voluntary or involuntary application for relief by Paragon under
the United States Bankruptcy Code (the "Bankruptcy Code") or similar
applicable state laws ("Insolvency Laws") will not result in consolidation
of the assets and liabilities of the Seller with those of Paragon. These
steps include the creation of the Seller as a separate, limited-purpose
subsidiary pursuant to a certificate of incorporation containing certain
limitations (including restrictions on the nature of the Seller's business
and a restriction on the Seller's ability to commence a voluntary case or
proceeding under any Insolvency Law without the prior unanimous affirmative
vote of all of its directors). However, there can be no assurance that the
activities of the Seller would not result in a court's concluding that the
assets and liabilities of the Seller should be consolidated with those of
Paragon in a proceeding under any Insolvency Law. See "The Seller." If a
court were to conclude that the assets and liabilities of the Seller should
be consolidated with those of Paragon in a proceeding under any Insolvency
Law, then any "true sale" to the Seller would be ineffective to remove the
Receivables and other assets from the bankruptcy estate of Paragon. See
"Risk of No 'True Sale'" below. Although there can be no assurance, the
Seller believes there is no material risk that the Trust would be
substantively consolidated with any other entity if that entity were to
become the subject of a proceeding under any Insolvency Law.
The Seller and Paragon each intend that the transfer of Receivables
by Paragon to the Seller will constitute a "true sale" of such Receivables.
The Seller will take steps in structuring its purchases of Receivables from
Paragon to increase the likelihood that such purchases will each be deemed
a "true sale". In particular, each such purchase will be without recourse
to Paragon for credit losses and at a purchase price believed by the
parties to represent the fair market value of the applicable Receivables.
If the transfer does, in fact, constitute such a "true sale," the
Receivables and the proceeds thereof would not be part Paragon's bankruptcy
estate under Section 541 of the Bankruptcy Code should Paragon become the
subject of a bankruptcy case subsequent to the transfer of the Receivables
to the Seller. It is a condition of the offering that the Seller shall have
received an opinion of counsel to the effect that, subject to certain
facts, assumptions and qualifications, the transfer of such Receivables by
Paragon to the Seller pursuant to the related Purchase Agreement would be
characterized as a "true sale'" of such Receivables to the Seller and such
Receivables would not form part of Paragon's bankruptcy estate pursuant to
Section 541 of the Bankruptcy Code.
<PAGE>
Notwithstanding the foregoing, if the Seller or Paragon were to
become a debtor in a bankruptcy case and a creditor or trustee in
bankruptcy of the Seller or Paragon or Paragon itself were to take the
position that the transfer of Receivables by the Seller to the Trust, or by
Paragon to the Seller, as the case may be, should instead be treated as a
pledge of the Receivables to secure a borrowing of the Seller or Paragon,
as the case may be, then delays in payments of collections of the
Receivables could occur or (should the court rule in favor of any such
trustee, debtor or creditor) reductions in the amount of such payments
could result. If the transfer of the Receivables by the Seller to the
Trust, or by Paragon to the Seller, is treated as a pledge instead of a
sale, a tax, government or other lien on the property of the Seller or
Paragon, as the case may be, arising before the transfer of the Receivables
to the Trust may have priority over the Trust's or the Seller's interest in
the Receivables.
5
<PAGE>
In Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d 948 (10th Cir.
1993), cert. denied 114 S.Ct 554 (1993), the United States Court of Appeals
for the 10th Circuit suggested that even where a transfer of accounts from
a seller to a buyer constitutes a "true sale," the accounts would
nevertheless constitute property of the seller's bankruptcy estate in a
bankruptcy of the seller. If the Seller were to become subject to a
bankruptcy proceeding and a court were to follow the Octagon court's
reasoning, Securityholders might experience delays in payment or possibly
losses on their investment in the Securities. The Permanent Editorial Board
of the UCC has issued an official commentary (PEB Commentary No. 14) which
characterizes the Octagon court's interpretation of Article 9 of the UCC as
erroneous. Such commentary states that nothing in Article 9 is intended to
prevent the transfer of ownership of accounts or chattel paper. However,
such commentary is not legally binding on any court.
Limitations on Realization Upon Financed Vehicles Because of Insolvency of
Obligors May Cause Payment Reductions or Delays
Numerous statutory provisions, including Insolvency Laws, may
interfere with or affect the ability of a secured party to realize upon
collateral or to enforce a deficiency judgment against an obligor. For
example, in a Chapter 13 proceeding under the Bankruptcy Code, a court may
prevent a creditor from repossessing a vehicle, and, as part of the
obligor's rehabilitation plan, reduce the amount of the secured
indebtedness to the market value of the vehicle at the time of bankruptcy
(as determined by the court), leaving the creditor as a general unsecured
creditor for the remainder of the indebtedness. A bankruptcy court may also
reduce the monthly payments due under a contract or change the rate of
interest and time of repayment of the indebtedness. To the extent that any
credit enhancement for such Trust were insufficient to cover all such
losses, such actions could result in an inability of holders of the Notes
(if any) and Certificates issued by such Trust to recover payment in full
of their respective principal amounts and interest thereon or could result
in delays in such payments.
Limitations on Enforceability of the Receivables Because of Consumer Protection
Laws May Cause Payment Reductions or Delays
Federal and state consumer protection laws regulate the creation and
enforcement of consumer contracts and loans such as the Receivables.
Specific statutory liabilities are imposed upon creditors who fail to
comply with these regulatory provisions. In some cases, this liability
could affect an assignee's ability to enforce a Receivable. Application of
such laws could also render a Receivable unenforceable, cause the Trust to
be unable to collect any balance remaining due on the Receivable or result
in liability to the Trust. If an Obligor had a claim against any Trust for
violation of these laws prior to the Cutoff Date, the Seller will be
obligated to repurchase the related Receivable unless the breach is cured.
If the Seller fails to repurchase such Receivable, payments to
Securityholders could be reduced or delayed. See "Certain Legal Aspects of
the Receivables--Consumer Protection Laws."
<PAGE>
Payments Will Be Made Only from the Limited Assets of the Applicable Trust
No Trust will have, or be permitted or expected to have, any
significant assets or sources of funds other than the Receivables and, to
the extent provided in the related Prospectus Supplement, a Pre-Funding
Account, a Revolving Account, a Reserve Account and any other credit
enhancement. The Notes of any series will represent obligations solely of,
and the Certificates of any series will represent interests solely in, the
related Trust and neither the Notes nor the Certificates of any series will
be insured or guaranteed by Paragon, the Seller, the Servicer, any Trustee,
any Indenture Trustee or any other person or entity. Consequently, holders
of the Securities of any series must rely for repayment upon payments on
the related Receivables and, if and to the extent available, amounts on
deposit in the Pre-Funding Account (if any), the Revolving Account (if
any), the Reserve Account (if any) and any other credit enhancement, in
each case to the extent provided in the related Prospectus Supplement.
Amounts to be deposited in any such Reserve Account with respect to any
Trust will be limited in amount and the amount required to be on deposit in
such Reserve Account will be reduced as the Pool Balance is reduced. In
addition, funds in any such Reserve Account will be available on each
Payment Date to cover shortfalls in distributions of interest and principal
on the related Securities. If any such Reserve Account is depleted, the
related Trust will depend solely on current payments on its Receivables and
other credit enhancement (if any) to make payments on the related
Securities. If losses occur which are not covered by the Reserve Account
(if any) or any other credit enhancement or which exceed the amount covered
by such credit
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enhancement, holders of Securities may be unable to receive payment in full
of principal and interest on their respective Securities.
If so directed by the holders of the requisite percentage of
outstanding Notes of a series issued with respect to a Trust that issues
Notes, following an acceleration of the Notes upon an Event of Default, the
applicable Indenture Trustee may sell the related Receivables in certain
limited circumstances as specified in the related Indenture. See
"Description of the Notes--The Indenture--Events of Default; Rights upon
Event of Default." However, there is no assurance that the market value of
such Receivables will at any time be equal to or greater than the aggregate
principal amount of such outstanding Notes and the aggregate Certificate
Balance of all outstanding Certificates. Therefore, upon an Event of
Default with respect to the Notes of any series, there can be no assurance
that sufficient funds will be available to repay the related registered
holders of each class of Notes ("Noteholders") and registered holders of
Certificates ("Certificateholders" and together with any Noteholders, the
"Securityholders") in full. In addition, the amount of principal required
to be paid to Noteholders of such series under the related Indenture will
generally be limited to amounts available to be deposited in the applicable
Note Distribution Account. Therefore, the failure to pay principal on a
class of Notes generally will not result in the occurrence of an Event of
Default until the Final Scheduled Payment Date (as defined in the related
Prospectus Supplement, the "Final Scheduled Payment Date") for such class
of Notes.
Recourse to Paragon, the Seller, the Servicer and their Affiliates for Payments
Will Be Strictly Limited
Paragon, the Seller and their affiliates are generally not obligated
to make any payments to Securityholders in respect of any Securities.
However, the Seller will make representations and warranties with respect
to the characteristics of the Receivables. In certain circumstances, the
Seller may be required to repurchase Receivables with respect to which the
representations and warranties have been breached. If the Seller fails to
repurchase such Receivables, payments to Securityholders may be reduced or
delayed. See "Description of the Transfer and Servicing Agreements--Sale
and Assignment of Receivables."
In addition, in certain circumstances, the Servicer may be required
to purchase Receivables. If the Servicer fails to purchase such
Receivables, payments to Securityholders may be reduced or delayed. See
"Description of the Transfer and Servicing Agreements--Servicing
Procedures." If Paragon were to stop acting as the Servicer, delays in
processing payments on the Receivables and information in respect of the
Receivables could occur and result in delays in payments to the
Securityholders.
<PAGE>
Inclusion of Subsequent Receivables in a Trust May Result in Additional Risk of
Payment Reductions or Delays or Reductions in Interest Rate Yield
Prepayment and Reinvestment Risk if Subsequent Receivables Are not
Purchased by the Trust. If so specified in the applicable Prospectus
Supplement, the property of a Trust may include monies on deposit in a
Pre-Funding Account or Revolving Account. These monies will be used to
purchase or otherwise acquire additional Receivables ("Subsequent
Receivables") from the Seller from time to time during the Funding Period
(as such term is defined in the related Prospectus Supplement, the "Funding
Period") or Revolving Period (as such term is defined in the related
Prospectus Supplement, the "Revolving Period") specified in the related
Prospectus Supplement. If a Pre-Funding Account or Revolving Account is
included in the property of a Trust and Paragon cannot generate Subsequent
Receivables to be conveyed to the Seller for later conveyance to this
Trust, the amount on deposit in these accounts cannot be applied to the
purchase of Subsequent Receivables during the Funding Period or Revolving
Period, as applicable. The Funding Period may be up to one year in length
in the case of any Trust that issues Notes and 90 days after the Closing
Date for any other Trust. The duration of any Revolving Period will be set
forth in the related Prospectus Supplement. If any amounts on deposit in
the Pre-Funding Account or Revolving Account have not been fully applied to
the purchase of Subsequent Receivables by a Trust by the end of the
applicable Funding Period or Revolving Period, the holders of Securities
issued by the related Trust will receive, on the Payment Date on or
immediately after the last day of the applicable Funding Period or
Revolving Period, as applicable, a prepayment of principal in an amount
equal to the amount remaining in the Pre-Funding Account or Revolving
Account. It is anticipated that the principal balance of Subsequent
Receivables sold to a Trust will not be exactly equal to the amount on
deposit in the Pre- Funding Account or the Revolving Account, and that
therefore there will be at least a nominal amount of principal prepaid to
the holders of the Securities of the Trust. The transfer of Subsequent
Receivables to the Trust may also result in accelerated payments of
principal to Securityholders because of an increased level of
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prepayments on the Subsequent Receivables. Securityholders will bear the
reinvestment risk associated with any such distribution of amounts on
deposit in the Pre-Funding Account or Revolving Account after the
termination of the applicable Pre-Funding Period or Revolving Period, as
applicable.
Possible Changes in Characteristics of the Receivables Pool When
Subsequent Receivables Are Purchased by the Trust. Subsequent Receivables
may be originated by the Paragon at a later date using credit criteria
different from those which were applied to any the Receivables initially
sold or transferred to the Trust on or before the Closing Date (the
"Initial Receivables") and may be of a different credit quality. However,
the transfer of Subsequent Receivables to a Trust will be subject to the
condition, among others, that the Rating Agency has notified the Seller in
writing on the Closing Date that, following the transfer of such Subsequent
Receivables to the Trust in accordance with the provisions of the Transfer
and Servicing Agreements, the rating with respect to each class of
Securities issued by such Trust will not be lowered or withdrawn.
Extension or Deferral of Payments on Receivables May Increase Weighted Average
Life of Securities
In certain circumstances, the Servicer may permit the extension or
modification of Receivables on a case-by-case basis. Any such extensions or
modifications may increase the weighted average life of the related
Securities. Any reinvestment risks resulting from faster or slower payment
resulting from extensions, modifications or amendments of payments on
Receivables held by the Trust will be borne entirely by the
Securityholders. The Servicer will not be permitted to grant any such
extension or modification if as a result the final scheduled payment on a
Receivable would fall after the related Final Scheduled Maturity Date (as
defined in the related Prospectus Supplement, the "Final Scheduled Maturity
Date"), unless the Servicer repurchases the affected Receivable. See "Risk
Factors--Risk of Prepayment and Possible Adverse Effect on Yield" and
"Weighted Average Life of the Securities."
Termination of the Servicer May Cause Payment Reductions or Delays
With respect to a series of Securities that includes Notes, in the
event a Servicer Termination Event occurs, the Indenture Trustee or the
Noteholders with respect to such series, as described under "Description of
the Transfer and Servicing Agreements--Rights upon Servicer Termination
Event" may remove the Servicer without the consent of the Trustee or any of
the Certificateholders with respect to such series. The Trustee or the
Certificateholders with respect to such series will not have the ability to
remove the Servicer if a Servicer Termination Event occurs. In addition,
the Noteholders of such series will have the ability, with certain
specified exceptions, to waive Servicer Termination Events by the Servicer,
including Servicer Termination Events that could materially adversely
affect the Certificateholders of such series. See "Description of the
Transfer and Servicing Agreements -- Waiver of Past Defaults." The Servicer
believes that its credit loss and delinquency experience reflect in part
its trained staff and collection procedures. There can be no assurance that
collections with respect to the Receivables will not be adversely affected
by any change in Servicer.
<PAGE>
Security Owners Will Only Be Able to Exercise Their Rights Indirectly
Each class of Securities of a given series will be initially
represented by one or more certificates registered in the name of Cede &
Co. ("Cede"), or any other nominee for the Depository Trust Company ("DTC")
set forth in the related Prospectus Supplement (Cede, or such other
nominee, "DTC's Nominee"), and will not be registered in the names of the
beneficial owners of the Securities ("Security Owners") of such series or
their nominees unless Definitive Securities are issued. As a result, unless
and until Definitive Securities for such series are issued, such Security
Owners will not be recognized by the Trustee or any applicable Indenture
Trustee as "Certificateholders", "Noteholders" or "Securityholders", as the
case may be (as such terms are used herein or in the related Pooling and
Servicing Agreement or related Indenture and Trust Agreement, as
applicable). Hence, until Definitive Securities are issued, such Security
Owners will only be able to exercise the rights of Securityholders
indirectly through DTC, Cedel or Euroclear and their participating
organizations. See "Certain Information Regarding the
Securities--Book-Entry Registration" and "--Definitive Securities."
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<PAGE>
Ratings of the Securities Do Not Address Suitability of Investment
It is a condition to the issuance of each class of Securities offered
hereby that they are rated by at least one nationally recognized
statistical rating agency (the "Rating Agency") in one of its generic
rating categories which signifies investment grade. A rating is not a
recommendation to purchase, hold or sell Securities, inasmuch as such
rating does not comment as to market price or suitability for a particular
investor. The ratings of the Securities address the likelihood of the
timely payment of interest on and the ultimate payment of principal of the
Securities pursuant to their terms. There can be no assurance that a rating
will remain for any given period of time or that a rating will not be
lowered or withdrawn entirely by a Rating Agency if in its judgment
circumstances in the future so warrant.
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<PAGE>
THE TRUSTS
With respect to each series of Securities, the Seller will establish
a separate Trust pursuant to the respective Trust Agreement or Pooling and
Servicing Agreement, as applicable, for the transactions described herein
and in the related Prospectus Supplement. The property of each Trust will
include a pool (a "Receivables Pool") of Receivables pursuant to which a
purchaser (an "Obligor") of a Financed Vehicle is obligated. The property
of each Trust will also include all payments due or received with respect
to Receivables after the Cutoff Date (as such term is defined in the
related Prospectus Supplement, a "Cutoff Date"). Pursuant to each Dealer
Agreement, the applicable Dealer is obligated to purchase from Paragon that
is a party to such Dealer Agreement any Receivables sold or originated
thereunder which do not meet certain representations made by that Dealer,
and, to the extent set forth in the related Prospectus Supplement, any
uncollectible Receivables covered by recourse plans ("Dealer Recourse").
The Receivables of each Receivables Pool will be serviced by the Servicer.
See "The Servicer." Receivables that are to be included in any Receivables
Pool will be transferred pursuant to a Purchase Agreement (the "Purchase
Agreement") by Paragon to the Seller for purposes of transfer to the
applicable Trust. In addition, to the extent described in any Prospectus
Supplement, the related Receivables Pool may include Receivables acquired
by Paragon through acquisitions.
On or before the applicable Closing Date, the Seller will sell the
Initial Receivables of the applicable Receivables Pool to the Trust. To the
extent so provided in the related Prospectus Supplement, Subsequent
Receivables will be conveyed to the Trust as frequently as daily during a
Funding Period. Any Subsequent Receivables so conveyed will also be assets
of the applicable Trust and will be subject to the prior rights of the
related Indenture Trustee and the Noteholders, if any, therein. The
property of each Trust will also include (i) all of the right, title and
interest of Paragon and the Seller in and to (i) the security interests of
Paragon and the Seller in the related Financed Vehicles and any other
interest of Paragon and the Seller in the related Financed Vehicles,
including the certificates of title with respect to such Financed Vehicles,
(ii) certain insurance policies and any proceeds from such insurance
policies relating to the Receivables, the Obligors or the related Financed
Vehicles, including rebates or refunds of premiums, (iii) the rights of
Paragon and the Seller against Dealers with respect to the Receivables,
(iv) the rights of the Seller under the related Purchase Agreement, (v) all
funds on deposit from time to time in the trust accounts established and
maintained pursuant to the related Transfer and Servicing Agreement,
including all income thereon and proceeds thereof, and (vi) all proceeds
and investments of any of the foregoing, provided that, with respect to any
series of Notes, the relevant rights and benefits with respect to such
property will be assigned by the Seller and the Trustee to the related
Indenture Trustee for the benefit of the related Securityholders. To the
extent specified in the related Prospectus Supplement, a Pre-Funding
Account, a Revolving Account, a Reserve Account or other form of credit
enhancement may be a part of the property of any given Trust or may be held
by the Trustee or an Indenture Trustee for the benefit of holders of the
related Securities.
If so specified in the related Prospectus Supplement, a Trust may
acquire Initial Receivables pursuant to warehouse financing arrangements
entered into prior to the sale by that Trust of any Notes offered hereby.
"Warehouse financing" generally refers to interim financing of Receivables
during the period from the purchase or funding of the Receivables by
Paragon until the securitization of the Receivables. In some cases, to the
extent specified in the related Prospectus Supplement, a Trust that issues
Notes will acquire Receivables prior to the issuance of the Notes and/or
Certificates ultimately to be issued by that Trust. The interim financing
for such acquisitions will be provided by the issuance by the Trust of
notes or certificates which were privately placed. Such notes or
certificates will be refinanced by the sale of the Notes and/or
Certificates. It will be a condition to the issuance of any Securities
which refinance other securities issued by any such Trust that such
warehouse financing be repaid to the extent provided in the related
Prospectus Supplement, and any related security interests released, at or
prior to the time of such issuance.
<PAGE>
The Servicer will service the Receivables held by each Trust and will
receive fees for such services. See "Description of the Transfer and
Servicing Agreements--Servicing Compensation and Payment of Expenses"
herein and "--Servicing Compensation and Payment of Expenses" in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, to facilitate the servicing of the Receivables each
Trustee will authorize the Servicer to retain physical possession of the
documents representing the Receivables held by each Trust and other
documents relating thereto as custodian for each such Trust. Due to
administrative burden and expense (i.e., fees payable to state motor
vehicle departments ranging up to approximately forty
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dollars per vehicle and related paperwork), the certificates of title to
the Financed Vehicles will not be amended to reflect the sale and
assignment of the security interest in the Financed Vehicles to the Seller
or each Trust. In the absence of such amendments, the Seller and such Trust
may not have a perfected security interest in the Financed Vehicles in all
states. See "Certain Legal Aspects of the Receivables" and "Description of
the Transfer and Servicing Agreements--Sale and Assignment of Receivables."
Notes and Certificates of a given Series will be issued by the same
Trust and payable from the same Trust property. If the protection provided
to any Noteholders of a given series by the subordination of the related
Certificates and by the Reserve Account (if any) or other credit
enhancement for such series, or the protection provided to
Certificateholders by any such Reserve Account or other credit enhancement
is insufficient, such Noteholders or Certificateholders, as the case may
be, would have to look principally to the Obligors on the related
Receivables, the proceeds from the repossession and sale of Financed
Vehicles which secure defaulted Receivables and the proceeds from any
recourse against Dealers with respect to such Receivables. In such event,
certain factors, such as the applicable Trust's not having perfected
security interests in the Financed Vehicles in all states, may affect the
Servicer's ability to repossess and sell the collateral securing the
Receivables, and thus may reduce the proceeds to be distributed to the
holders of the Securities of such series. See "Description of the Transfer
and Servicing Agreements--Distributions", "--Credit and Cash Flow
Enhancement" and "Certain Legal Aspects of the Receivables."
If so specified in the related Prospectus Supplement, a Trust may
make an election to be treated as a "financial asset securitization
investment trust" or "FASIT." The applicable Transfer and Servicing
Agreement for such a Trust may contain any such terms and provide for the
issuance of Notes or Certificates on such terms and conditions as are
permitted to a FASIT and described in the related Prospectus Supplement.
See "Federal Income Tax Consequences--FASIT Legislation."
The principal offices of the applicable Trust (if any) and the
related Trustee will be specified in the related Prospectus Supplement.
The Trustee
The Trustee for each Trust will be specified in the related
Prospectus Supplement. The Trustee's liability in connection with the
issuance and sale of the related Securities is limited solely to the
express obligations of such Trustee set forth in the related Trust
Agreement and the applicable Transfer and Servicing Agreement. The Trustee
under each Trust Agreement will perform administrative functions under such
Trust Agreement, including making distributions from the Certificate
Distribution Account. A Trustee may resign at any time, in which event the
Servicer, or its successor, will be obligated to appoint a successor
trustee. The Servicer may also remove the Trustee if the Trustee ceases to
be eligible to continue as Trustee under the related Trust Agreement or
Pooling and Servicing Agreement, as applicable, or if the Trustee becomes
insolvent. In such circumstances, the Servicer will be obligated to appoint
a successor trustee. Any resignation or removal of a Trustee and
appointment of a successor trustee will not become effective until
acceptance of the appointment by the successor trustee.
<PAGE>
THE RECEIVABLES POOLS
General
The Receivables in each Receivables Pool will be motor vehicle retail
installment sales contracts secured by new or used motor vehicles entered
into between Obligors and automotive dealers and may include motor vehicle
promissory notes and security agreements executed by an Obligor in favor of
a motor vehicle lender ("Direct Loans"). The Receivables to be held by each
Trust will be selected from the Receivables portfolio of Paragon for
inclusion in a Receivables Pool by several criteria, including that each
Receivable (i) is secured by a new or used vehicle, (ii) was originated in
the United States, (iii) is a Precomputed Receivable or a Simple Interest
Receivable and (iv) as of the Cutoff Date (a) had an outstanding principal
balance of at least the amount set forth in the related Prospectus
Supplement, (b) had a scheduled maturity not later than the date set forth
in the related Prospectus Supplement, (c) had an original term to maturity
of not more than the period set forth in the related Prospectus Supplement
and (d) had a contractual rate of interest ("APR") of not less than the
rate per
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annum set forth in the related Prospectus Supplement. No selection criteria
or procedures believed by the Seller to be adverse to the Securityholders
are to be used in selecting the Receivables.
"Precomputed Receivables" provide for allocation of payments
according to the 'sum of periodic balances' or 'sum of monthly payments'
method, similar to the 'Rule of 78's' ("Rule of 78's Receivables") or are
monthly actuarial receivables ("Actuarial Receivables" and, together with
Rule of 78's Receivables, "Precomputed Receivables"). An Actuarial
Receivable provides for amortization of the amount financed over a series
of fixed level payment installments. Each monthly installment, including
the installment representing the final payment on the Receivable, consists
of an amount of finance charge equal to 1/12 of the APR of the account
multiplied by the unpaid amount financed, and a portion of the amount
financed equal to the remainder of the installment. A Rule of 78's
Receivable provides for the payment by the obligor of a specified total
amount of payments, payable in equal installments on each due date. The
total represents the amount financed and finance charge in an amount
calculated on the basis of the stated APR for the term of the receivable.
The rate at which interest is earned is calculated in accordance with the
'Rule of 78's.' The 'Rule of 78's' is a method of calculating the unearned
portion of the precomputed finance charge on Receivables payable in
substantially equal successive installments of approximately equal
intervals over 12 months. The unearned portion of the precomputed finance
charge to be refunded if a Receivable is prepaid is equal to that portion
of the finance charge which the sum of the number of months the obligations
are outstanding after the date of prepayment (counting 1 month as 1, 2
months as 3 (1 + 2), etc., up to 78) bears to 78.
"Simple Interest Receivables" provide for the amortization of the
amount financed under the Receivable over a series of fixed level monthly
payments (except that the last payment may be different). However, unlike
the monthly payments under an Actuarial Receivable, each monthly payment
consists of an installment of interest that is calculated on the basis of
the outstanding principal balance of the receivable multiplied by the
stated APR and further multiplied by the period elapsed (as a fraction of a
calendar year) since the last payment of interest was made. As payments are
received under a Simple Interest Receivable, they are applied first to
interest accrued to the date of payment, and the balance is applied to
reduce the unpaid principal balance. Accordingly, if an obligor pays a
fixed monthly installment before its scheduled due date, the portion of the
payment allocable to interest for the period since the preceding payment
was made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid
principal balance will be correspondingly greater. Conversely, if an
obligor pays a fixed monthly installment after its scheduled due date, the
portion of the payment allocable to interest for the period since the
preceding payment was made will be greater than it would have been had the
payment been made as scheduled, and the portion of the payment applied to
reduce the unpaid principal balance will be correspondingly less. In either
case, the obligor pays a fixed monthly installment until the final
scheduled payment date, at which time the amount of the final installment
is increased or decreased as necessary to repay the then outstanding
principal balance and unpaid accrued interest. If a receivable is prepaid,
the Obligor is required to pay interest only to the date of prepayment.
Information with respect to each Receivables Pool will be set forth
in the related Prospectus Supplement, including, to the extent appropriate,
the composition, the distribution by APR and by the geographic location,
the portion of such Receivables Pool consisting of Precomputed Receivables
and of Simple Interest Receivables and the portion of such Receivables Pool
secured by new vehicles and by used vehicles.
<PAGE>
Underwriting
Paragon positions itself in the dealership market as prime quality
financing source and offers distinct vehicle financing programs to its
dealers. These offerings vary based upon (a) credit quality of the
customer, (b) the percentage of wholesale value of the vehicle that Paragon
is willing to advance and (c) pricing (i.e., annual percentage rate and
dealer participation paid). Paragon strives to provide professional service
to its dealers, including by (i) providing dealers with written credit
guidelines, (ii) making consistent credit decisions and (iii) providing
credit decisions seven days a week, with credit approvals for most eligible
applicants within 30 minutes of receipt of the application. Paragon's
competitors include money center and regional commercial banks, as well as
other captive and independent finance companies.
A signed Dealer Agreement is a prerequisite for Paragon's purchase of
contracts from a dealer and provides representations and warranties with
respect to each contract sold to Paragon. Dealer relationships are
developed and maintained by Paragon's experienced sales representatives.
Sales representatives typically target dealers with
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whom they have had past relationships. Dealers must also have a
concentration of "high line" vehicles (that is, luxury and near-luxury
automobiles and certain select sports utility vehicles).
Credit underwriting is centralized at Paragon's service center in St.
Louis, Missouri. Dealers typically remit applications to the service center
via facsimile. Credit analysts underwrite each application using Paragon's
written underwriting guidelines and application processing software, known
as Automated Credit Applications Processing System ("ACAPS"). ACAPS
electronically obtains credit bureau reports on each applicant and provides
interpretation of the reports.
Paragon's guidelines are geared toward "prime" credits and,
therefore, analysts employ credit scoring in their credit decision. The
credit scoring system utilized by Paragon is a "launch scorecard" purchased
from Experian's Strategic Solutions Division, which calculates a credit
score based upon a statistical algorithm derived from the performance of
over 1,000,000 motor vehicle retail installment contracts. Other important
factors in Paragon's credit decisions include previous credit experience,
total debt payment obligations to income ratios, employment stability and
residence stability. Once an applicant is approved and Paragon receives the
contract documentation from the dealer, documentation specialists verify
that (a) the contract and all related documents are completed properly and
all signatures are in order and (b) the contract conforms to the credit
decision, including the name of the customer, the specific vehicle, the
additional equipment and the amount of the advance, prior to purchasing the
contract from the dealer.
Subsequent Receivables
Subsequent Receivables may be originated at a later date using credit
criteria different from those which were applied to any Initial Receivables
and may be of a different credit quality. Periodic information regarding
the Subsequent Receivables will be included under Item 5 in a Current
Report filed on Form 8-K with the Commission pursuant to the Exchange Act
with respect to each Trust to which Subsequent Receivables have been
transferred.
Servicing and Collections
Paragon handles all servicing and collection functions from its
centralized service center in St. Louis, Missouri. Paragon sends monthly
statements to each customer to provide an active reminder of the due date
and amount of each payment. The statements direct payments to the lockbox
maintained with NationsBank, N.A. in St. Louis. For a description of the
lockbox arrangements, see "The Transaction Documents--Collections."
For delinquent payments, Paragon organizes the collection workload
based upon the seriousness of the delinquency. Therefore, more senior
customer service representatives work the accounts that are more than 30
days delinquent and the less seasoned customer service representatives work
the earlier delinquency stages. Collection activities begin through
telephone contact with delinquent customers once a contract becomes 10 days
delinquent (or, in the case of first payment defaults, one day delinquent).
Frequent telephone contact is typically maintained until either (a) the
delinquent payment is made by the customer, (b) the customer breaks several
promises to make such payment or (c) the customer misses a second payment
(i.e., is more than 30 days delinquent). The decision to repossess a
vehicle is typically addressed by the collections manager prior to the 45th
day of delinquency. Paragon believes that addressing the decision to
repossess a vehicle early in the delinquency will lead to lower net losses
over the life of the portfolio. Paragon's loss recognition policy is
generally to charge off a contract upon the earliest to occur of: (i)
repossession and sale of the vehicle; (ii) a good faith determination by
collections management that no further proceeds are expected to be received
on such contract; or (iii) such contract becomes 120 days delinquent.
<PAGE>
Information Technology and Systems
Paragon's information technology needs are met with a system
consisting of two mainframe computers (which are provided by vendors) and
personal computer local area networks linking the mainframes with the St.
Louis service center and Paragon's headquarters in Mission Viejo. The
mainframe computers house Paragon's credit application processing system,
ACAPS, and Paragon's loan accounting and collections systems, Shaw IL 2000
and CS 2000. The mainframe which runs ACAPS is provided by CBC Companies,
Inc. and is located in Columbus, Ohio. Communication between Columbus and
St. Louis is conducted over a dedicated, leased
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telephone line. The mainframe that runs Paragon's loan accounting and
collections programs is provided by CSC Logic, Inc./MSA d/b/a Loan
Servicing Enterprise (LSE) ("CSC"). These programs reside on CSC's
mainframe computer in Dallas, Texas, with which the service center
communicates through a dedicated, leased telephone line.
Delinquency and Loss Experience
Certain information concerning the experience of Paragon pertaining
to delinquency and loss experience with respect to Receivables will be set
forth in the related Prospectus Supplement. There can be no assurance that
the delinquency and net loss experience on any Receivables Pool will be
comparable to prior experience or to such information.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
The weighted average life of the Notes, if any, and the Certificates
of any series will generally be influenced by the rate at which the
principal balances of the related Receivables are paid, which payment may
be in the form of scheduled amortization or prepayments. See "Description
of the Transfer and Servicing Agreements--Accounts." All of the Receivables
are repayable at any time without penalty (or with only a nominal penalty)
to the Obligor. The rate of prepayment of automotive receivables is
influenced by a variety of economic, social and other factors, including
decreases in the general level of prevailing interest rates, the desire of
the Obligor to purchase a new vehicle and the fact that an Obligor
generally may not sell or transfer the Financed Vehicle securing a
Receivable unless such Receivable is paid in full. In addition, under
certain circumstances, the Seller will be obligated to repurchase
Receivables from a given Trust pursuant to the related Transfer and
Servicing Agreement as a result of breaches of representations and
warranties and the Servicer will be obligated to purchase Receivables from
such Trust pursuant to such Transfer and Servicing Agreement as a result of
breaches of certain covenants. Holders of Securities should consider, in
the case of Securities purchased at a discount, the risk that a slower than
anticipated rate of principal payments on the Receivables could result in
an actual yield that is less than the anticipated yield and, in the case of
Securities purchased at a premium, the risk that a faster than anticipated
rate of principal payments on the Receivables could result in an actual
yield that is less than the anticipated yield. See "Description of the
Transfer and Servicing Agreements--Sale and Assignment of Receivables" and
"--Servicing Procedures." See also "Description of the Transfer and
Servicing Agreements--Termination" regarding the option of the Seller and
Servicer to purchase the Receivables from a given Trust and "--Insolvency
Event" regarding the sale of the Receivables owned by a Trust that is not a
grantor trust if an Insolvency Event with respect to the Seller occurs.
No prediction can be made as to the rate of prepayment on the
Receivables. The Servicer is not aware of any publicly available industry
statistics for the entire industry on an aggregate basis that set forth
principal prepayment experience for Receivables similar to the Receivables
over an extended period of time.
In light of the above considerations, there can be no assurance as to
the amount of principal payments to be made on the Notes, if any, or the
Certificates of a given series on each Payment Date, since such amount will
depend, in part, on the amount of principal collected on the related
Receivables Pool during the applicable Collection Period. Any reinvestment
risks resulting from a faster or slower incidence of prepayment of
Receivables will be borne entirely by the Noteholders, if any, and the
Certificateholders of a given series. The related Prospectus Supplement may
set forth certain additional information with respect to the maturity and
prepayment considerations applicable to the particular Receivables Pool and
the related series of Securities.
<PAGE>
Consistent with its customary servicing practices and procedures, the
Servicer or its designee may, in its discretion and on a case-by-case
basis, arrange with Obligors to extend or modify the terms of the related
Receivables. Extensions and modifications are generally only granted in
cases of short-term financial hardship, such as unexpected medical
expenses, unexpected car repair expenses or a temporary leave of absence
from employment, and are generally limited to one extension of no more than
three months duration per year per Obligor. Any extensions or modifications
of Receivables may increase the weighted average life of the related
Securities. Unless the Servicer repurchases the affected Receivable, the
Servicer will not be permitted voluntarily to grant any extension or
modification if as a result the final scheduled payment on a Receivable
would fall after
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the related Final Scheduled Maturity Date or modify a Receivable in a Trust
to be treated as a grantor trust if such modification would result in a
deemed exchange of such Receivable under Section 1001 of the Code.
POOL FACTORS AND TRADING INFORMATION
The "Note Pool Factor" for each class of Notes will be a seven-digit
decimal which the Servicer will compute prior to each distribution with
respect to such class of Notes expressing the remaining outstanding
principal balance of such class of Notes, as of the applicable Payment Date
(after giving effect to payments to be made on such Payment Date), as a
fraction of the initial outstanding principal balance of such class of
Notes. The "Certificate Pool Factor" for each class of Certificates will be
a seven-digit decimal which the Servicer will compute prior to each
distribution with respect to such class of Certificates expressing the
remaining Certificate Balance of such class of Certificates, as of the
applicable Payment Date (after giving effect to distributions to be made on
such Payment Date), as a fraction of the initial Certificate Balance of
such class of Certificates. Each Note Pool Factor and each Certificate Pool
Factor will initially be 1.0000000 and thereafter will decline to reflect
reductions in the outstanding principal balance of the applicable class of
Notes, or the reduction of the Certificate Balance of the applicable class
of Certificates, as the case may be. A Noteholder's portion of the
aggregate outstanding principal balance of the related class of Notes is
the product of (i) the original denomination of such Noteholder's Note and
(ii) the applicable Note Pool Factor. A Certificateholder's portion of the
aggregate outstanding Certificate Balance for the related class of
Certificates is the product of (i) the original denomination of such
Certificateholder's Certificate and (ii) the applicable Certificate Pool
Factor.
The Noteholders, if any, and the Certificateholders will receive
reports on or about each Payment Date concerning payments received on the
Receivables, the Pool Balance (as such term is defined in the related
Prospectus Supplement, the "Pool Balance"), each Certificate Pool Factor or
Note Pool Factor, as applicable, and various other items of information,
including amounts allocated or distributed for such Payment Date. In
addition, Securityholders of record during any calendar year will be
furnished information for tax reporting purposes not later than the latest
date permitted by law. See "Certain Information Regarding the
Securities--Reports to Securityholders."
USE OF PROCEEDS
The net proceeds from the sale of the Securities of a given series
will be applied by the Seller or the applicable Trust (i) to the purchase
of the Receivables and/or repayment of any related Warehouse Financing,
(ii) to make the initial required deposit (if any) into any Reserve Account
or other account established in connection with a given series, (iii) to
make the deposit of the amount (the "Pre-Funded Amount") to be deposited
into the Pre-Funding Account (as such term is defined in the related
Prospectus Supplement, the "Pre-Funding Account") or the Revolving Account
(as such term is defined in the related Prospectus Supplement, the
"Revolving Account") on the related Closing Date, if any, and (iv) such
other uses as may be set forth in the related Prospectus Supplement. The
portion of the net proceeds paid to the Seller will be used to purchase the
Receivables from Paragon.
<PAGE>
THE SELLER
The Seller is a wholly-owned subsidiary of Paragon. The Seller was
incorporated in the State of Delaware on November 20, 1997. The principal
executive offices of the Seller are located at 27405 Puerta Real, Suite
200, Mission Viejo, California 92691 and its telephone number is (949)
348-8700.
The Seller has taken steps in structuring the transactions described
herein and in the Prospectus Supplement that are intended to ensure that
the voluntary or involuntary application for relief by Paragon under any
Insolvency Laws will not result in consolidation of the assets and
liabilities of the Seller with those of Paragon. These steps include the
creation of the Seller as a separate, limited-purpose subsidiary pursuant
to a certificate of incorporation and bylaws containing certain limitations
(including restrictions on the nature of the Seller's business and a
restriction on the Seller's ability to commence a voluntary case or
proceeding under any Insolvency Law without the prior unanimous affirmative
vote of all of its directors). However, there can be no
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assurance that the activities of the Seller would not result in a court's
concluding that the assets and liabilities of the Seller should be
consolidated with those of Paragon in a proceeding under any Insolvency
Law. See "Risk Factors--Risk of Substantive Consolidation."
The Seller will warrant to the Trust in the applicable Transfer and
Servicing Agreement that the sale of the Receivables by the Seller to the
Trustee on behalf of the Trust is a valid sale of such Receivables. In
addition, the Seller, the Trustee and the Trust will treat the conveyance
by the Seller of the Receivables as a sale of the Receivables by the Seller
to the Trustee on behalf of the Trust and the Seller will take or cause to
be taken all actions that are required to perfect the Trustee's ownership
in such Receivables. If the Seller were to become a debtor in a bankruptcy
case and a creditor or trustee in bankruptcy of the Seller or the Seller
itself were to take the position that the sale of Receivables by the Seller
to the Trust should instead be treated as a pledge of the Receivables to
secure a borrowing of the Seller, then delays in payments of collections of
the Receivables could occur or (should the court rule in favor of any such
trustee, debtor or creditor) reductions in the amount of such payments
could result. If the transfer of the Receivables by the Seller to the
Trustee on behalf of the Trust is treated as a pledge instead of a sale, a
tax or government lien on the property of the Seller arising before the
transfer of the Receivables to the Trustee on behalf of the Trust may have
priority over such Trustee's interest in the Receivables. If the conveyance
by the Seller of the Receivables is treated as a sale, the Receivables
would not be part of the Seller's bankruptcy estate and would not be
available to the Seller's creditors.
PARAGON AND THE SERVICER
Paragon Acceptance Corporation, a Delaware corporation, is a
specialized consumer finance company engaged in the acquisition and
servicing of "prime" quality automobile, light duty truck and sports
utility vehicle retail installment sale contracts secured by recent model,
"high line" vehicles (that is, luxury and near-luxury automobiles and
certain select sports utility vehicles). Paragon purchases and services
motor vehicle retail installment contracts through its dealer service
center in St. Louis, Missouri. The headquarters and principal executive
offices of Paragon are located at 27405 Puerta Real, Suite 200, Mission
Viejo, California 92691.
DESCRIPTION OF THE NOTES
General
With respect to each Trust that issues Notes, one or more classes of
Notes of the related series will be issued pursuant to the terms of an
Indenture, a form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. The following summary,
together with the related summary in the Prospectus Supplement for a
particular Trust, describes all of the material terms and provisions of the
Indenture and Notes, but it does not purport to be complete and is subject
to, and is qualified by reference to, all the provisions of the applicable
Notes and Indenture.
<PAGE>
Each class of Notes will initially be represented by one or more
Notes, in each case registered in the name of a nominee of DTC (together
with any successor depository selected by the Trust, the "Depository")
except as set forth below. See "Certain Information Regarding the
Securities--Definitive Securities." Notes will be available for purchase in
denominations specified in the related Prospectus Supplement or, if not so
specified, in denominations of $1,000 and integral multiples thereof. Notes
may be issued in book-entry form or as Definitive Notes and if not
otherwise specified in the related Prospectus Supplement, will be issued in
book-entry form only. As to Notes issued in book-entry form, the Seller has
been informed by DTC that DTC's nominee will be Cede, unless another
nominee is specified in the related Prospectus Supplement. Accordingly,
such nominee is expected to be the holder of record of the Notes of each
such class. Unless and until Definitive Notes are issued in replacement for
book-entry Notes under the limited circumstances described herein or in the
related Prospectus Supplement, no beneficial owner of Notes (each, a "Note
Owner") will be entitled to receive a physical certificate representing a
Note. See "Certain Information Regarding the Securities--Definitive
Securities." As to the Notes issued in book-entry form, all references
herein and in the related Prospectus Supplement to actions by Noteholders
refer to actions taken by DTC upon instructions from its participating
organizations (the "Participants") and all references herein and in the
related Prospectus Supplement to distributions, notices, reports and
statements to Noteholders refer to distributions, notices, reports and
statements
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to DTC or its nominee, as the registered holder of the Notes, for
distribution to Noteholders in accordance with DTC's procedures with
respect thereto. See "Certain Information Regarding the
Securities--Book-Entry Registration" and "--Definitive Securities."
Principal and Interest on the Notes
The timing and priority of payment, seniority, Interest Rate and
amount of or method of determining payments of principal and interest on
each class of Notes of a given series will be described in the related
Prospectus Supplement. The right of holders of any class of Notes to
receive payments of principal and interest may be senior or subordinate to
the rights of holders of any other class or classes of Notes of such
series, as described in the related Prospectus Supplement. The dates for
payments of interest and principal on the Notes of such series may be
different from the Payment Dates for the Certificates of such series. To
the extent specified in the related Prospectus Supplement, payments of
interest on the Notes other than certain Strip Notes, if any, of such
series will be made prior to payments of principal thereon. To the extent
provided in the related Prospectus Supplement, a series may include one or
more classes of Notes ("Strip Notes") entitled to (i) principal payments
with disproportionate, nominal or no interest payments or (ii) interest
payments with disproportionate, nominal or no principal payments. Each
class of Notes may have a different Interest Rate, which may be a fixed,
variable or adjustable Interest Rate (and which may be zero for certain
classes of Strip Notes), or any combination of the foregoing. The related
Prospectus Supplement will specify the Interest Rate for each class of
Notes of a given series or the method for determining such Interest Rate.
See also "Certain Information Regarding the Securities--Fixed Rate
Securities" and "--Floating Rate Securities." One or more classes of Notes
of a series may be redeemable in whole or in part under the circumstances
specified in the related Prospectus Supplement, including at the end of the
Funding Period (if any) or as a result of the exercise by the Seller or
Servicer of its option to purchase the related Receivables Pool.
To the extent specified in the related Prospectus Supplement,
payments to Noteholders of all classes within a series in respect of
interest will have the same priority. Under certain circumstances, the
amount available for such payments could be less than the amount of
interest payable on the Notes on any of the dates specified for payments in
the related Prospectus Supplement (each, a "Payment Date", which may be the
same date as each applicable Payment Date as specified in the related
Prospectus Supplement), in which case each class of Noteholders will
receive its ratable share (based upon the aggregate amount of interest due
to such class of Noteholders) of the aggregate amount available to be
distributed in respect of interest on the Notes of such series. See
"Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit and Cash Flow Enhancement."
In the case of a series of Notes which includes two or more classes
of Notes, the sequential order and priority of payment in respect of
principal and interest, and any schedule or formula or other provisions
applicable to the determination thereof, of each such class will be set
forth in the related Prospectus Supplement. Payments in respect of
principal and interest of any class of Notes will be made on a pro rata
basis among all the Noteholders of such class.
To the extent specified in the related Prospectus Supplement, the
principal amount of Notes outstanding at any time may be reduced to reflect
losses in the Receivables experienced prior to such time.
Following are examples of various types of Notes which may be issued
by a Trust. The Prospectus Supplement accompanying this Prospectus will
describe in more detail any of the below-listed types of Notes actually
issued by a particular Trust.
<PAGE>
Fixed Payment Notes. To the extent specified in any Prospectus
Supplement, one or more classes of Notes of a given series may have fixed
principal payment schedules. Noteholders of such Notes would be entitled to
receive as payments of principal on any given Payment Date the applicable
amounts set forth on such schedule with respect to such Notes, in the
manner and to the extent set forth in the related Prospectus Supplement.
Short Term Asset Backed Notes. To the extent specified in any
Prospectus Supplement, one or more classes of Notes of a given series may
be entitled to receive principal payments prior to the receipt of principal
payments by other classes of Securities issued by the applicable Trust. If
so provided in the related Prospectus Supplement, such class or classes of
Notes will have a final scheduled maturity date of less than 397 days from
the initial trade
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date related thereto and such class or classes will have received a
short-term rating by a Rating Agency that is in one of the two highest
short-term rating categories. The failure to pay such a class of Notes on
or prior to the related Final Scheduled Maturity Date would constitute an
event of default under the related Indenture. In general, such class or
classes of Notes will otherwise be similar to Notes which are described in
this Prospectus.
Planned Amortization Class. To the extent specified in any Prospectus
Supplement, one or more classes of Notes of a given series may be
structured as a planned amortization class ("PAC"). A PAC will be retired
according to a predetermined amortization schedule set forth in the related
Prospectus Supplement and structured to be substantially independent of the
prepayment rate on the Receivables. The timing of distributions in respect
of the other classes of Securities in the related series in some instances
may be slowed down or accelerated so that the PAC scheduled amortization
may be met as provided in the related Prospectus Supplement. The planned
amortization for a PAC set forth in the related Prospectus Supplement
generally will require scheduled sinking fund payments for the PAC on each
Payment Date. Payments to the other classes of Securities in the related
series will be allocated as otherwise set forth in the related Prospectus
Supplement only after the scheduled sinking fund payments or scheduled
amortization payments to the PAC have been made.
Targeted Amortization Class. To the extent specified in any
Prospectus Supplement, one or more classes of Notes of a given series may
be structured as a targeted amortization class ("TAC"). Any TAC will be
similar to a PAC, with support classes providing protection against
prepayment risks to the TAC. However, a TAC will differ from a PAC in that
it generally may not receive as much protection against prepayments on the
Receivables as a PAC. In particular, a TAC will generally provide no
protection against the risk of prepayments occurring more slowly than the
rate of prepayment assumed for structuring purposes and generally will not
be structured to permit expected cash flows from non-TAC classes of
Securities to be diverted to the TAC.
Companion Class. To the extent specified in any Prospectus
Supplement, one or more classes of Notes of a given series may be designed
to receive principal payments on a Payment Date only if principal payments
have been made on a specified planned amortization class of Notes or
targeted amortization class of Notes, and to receive any excess payments
over the amount required to reduce the principal amount of the planned
amortization class or targeted amortization class to the planned or
targeted balance for such Payment Date.
The Indenture
Modification of Indenture. With respect to each Trust that has issued
Notes pursuant to an Indenture, the Trust and the Indenture Trustee may,
with the consent of the holders of a majority of the outstanding Notes of
the related series, execute a supplemental indenture to add provisions to,
change in any manner or eliminate any provisions of, the related Indenture,
or modify (except as provided below) in any manner the rights of the
related Noteholders.
<PAGE>
With respect to the Notes of a given series, without the consent of
the holder of each outstanding Note affected thereby, no supplemental
indenture will: (i) change the due date of any installment of principal of
or interest on any such Note or reduce the principal amount thereof, the
Interest Rate specified thereon or the redemption price with respect
thereto or change any place of payment where, or the coin or currency in
which, any such Note or any interest thereon is payable; (ii) impair the
right to institute suit for the enforcement of certain provisions of the
related Indenture regarding payment; (iii) reduce the percentage of the
aggregate amount of the outstanding Notes of such series, the consent of
the holders of which is required for any such supplemental indenture or the
consent of the holders of which is required for any waiver of compliance
with certain provisions of the related Indenture or of certain defaults
thereunder and their consequences as provided for in such Indenture; (iv)
modify or alter the provisions of the related Indenture regarding the
voting of Notes held by the applicable Trust, any other obligor on such
Notes, the Seller or an affiliate of any of them; (v) reduce the percentage
of the aggregate outstanding amount of such Notes, the consent of the
holders of which is required to direct the related Indenture Trustee to
sell or liquidate the Receivables; (vi) decrease the percentage of the
aggregate principal amount of such Notes required to amend the sections of
the related Indenture which specify the applicable percentage of aggregate
principal amount of the Notes of such series necessary to amend such
Indenture or certain other related agreements; or (vii) permit the creation
of any lien ranking prior to or on a parity with the lien of the related
Indenture with respect to any of the collateral for such Notes or, except
as otherwise permitted or contemplated in such Indenture, terminate the
lien of such Indenture on any such collateral or deprive the holder of any
such Note of the security afforded by the lien of such Indenture.
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The Trust and the applicable Indenture Trustee may also enter into
supplemental indentures, without obtaining the consent of the Noteholders
of the related series, for the purpose of, among other things, adding any
provisions to or changing in any manner or eliminating any of the
provisions of the related Indenture or of modifying in any manner the
rights of such Noteholders; provided that such action will not adversely
affect in any material respect the interest of any such Noteholder, unless
the Rating Agency then rating the Notes shall have notified the Seller, the
Servicer and the Indenture Trustee in writing that such action will not
result in a reduction or withdrawal of the rating of the affected Notes of
such series.
Events Of Default; Rights Upon Event of Default. With respect to the
Notes of a given series, "Events of Default" under the related Indenture
will consist of: (i) any failure to pay interest on the Notes as and when
the same becomes due and payable, which failure continues unremedied for
five days; (ii) any failure to make any required payment of principal on
the Notes; (iii) a default in the observance or performance in any material
respect of any covenant or agreement of the applicable Trust made in the
related Indenture, or any representation or warranty made by the applicable
Trust in the related Indenture or in any certificate delivered pursuant
thereto or in connection therewith having been incorrect as of the time
made, and the continuation of any such default or the failure to cure such
breach of a representation or warranty for a period of 30 days after there
shall have been given to such Trust by the applicable Indenture Trustee, or
to such Trust and such Indenture Trustee by the holders of at least 25% of
the aggregate outstanding principal balance of the Notes, a written notice
in accordance with the related Indenture; (iv) certain events of
bankruptcy, insolvency, receivership or liquidation with respect to the
Seller or the applicable Trust; and (v) failure to pay the unpaid principal
balance of any class of Notes on the respective Final Scheduled Payment
Date for such class. However, the amount of principal required to be paid
to Noteholders of such series under the related Indenture will generally be
limited to amounts available to be deposited in the applicable Note
Distribution Account. Therefore, the failure to pay principal on a class of
Notes generally will not result in the occurrence of an Event of Default
until the Final Scheduled Payment Date for such class of Notes.
If an Event of Default should occur and be continuing with respect to
the Notes of any series, the related Indenture Trustee or holders of a
majority in principal amount of such Notes then outstanding may declare the
principal of such Notes to be immediately due and payable. Such declaration
may, under certain circumstances, be rescinded by the holders of a
percentage of the principal amount of Notes then outstanding specified in
the related Prospectus Supplement and, if not so specified, may be
rescinded by the holder of a majority in principal amount of such Notes
then outstanding.
If the Notes of any series are due and payable following an Event of
Default with respect thereto, the related Indenture Trustee may institute
proceedings to collect amounts due or foreclose on Trust property, exercise
remedies as a secured party, sell the related Receivables or elect to have
the applicable Trust maintain possession of such Receivables and continue
to apply collections on such Receivables as if there had been no
declaration of acceleration. Such Indenture Trustee is prohibited from
selling the related Receivables following an Event of Default, other than a
default in the payment of any principal of or a default for five days or
more in the payment of any interest on any Note of such series, unless (i)
the holders of all such outstanding Notes and the holders of all
outstanding certificates consent to such sale, (ii) the proceeds of such
sale are sufficient to pay in full the principal of and the accrued
interest on such outstanding Notes and all outstanding Certificates on the
date of such sale, or (iii) such Indenture Trustee determines that the
proceeds of Receivables would not be sufficient on an ongoing basis to make
all payments on such Notes as such payments would have become due if such
obligations had not been declared due and payable, and such Indenture
Trustee obtains the consent of the holders of 66-2/3% of the aggregate
outstanding amount of such Notes and the holders of 100% of the aggregate
outstanding amount of the Certificates.
<PAGE>
If an Event of Default occurs and is continuing with respect to a
series of Notes, such Indenture Trustee will be under no obligation to
exercise any of the rights or powers under such Indenture at the request or
direction of any of the holders of such Notes, if such Indenture Trustee
believes it will not be adequately indemnified against the costs, expenses
and liabilities which might be incurred by it in complying with such
request or direction. Subject to the provisions for indemnification and
certain limitations contained in the related Indenture, the holders of a
majority in principal amount of the outstanding Notes of a given series
will have the right to direct the time, method and place of conducting any
proceeding or any remedy available to the applicable Indenture Trustee, and
the holders of a majority in principal amount of such Notes then
outstanding may, in certain cases, waive any default with respect thereto,
except a default in the payment of principal or interest or a default in
respect of a
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covenant or provision of such Indenture that cannot be modified without the
waiver or consent of all the holders of such outstanding Notes.
No holder of a Note of any series will have the right to institute
any proceeding with respect to the related Indenture, unless (i) such
holder previously has given to the applicable Indenture Trustee written
notice of a continuing Event of Default, (ii) the holders of not less than
25% in principal amount of the outstanding Notes of such series have made
written request to such Indenture Trustee to institute such proceeding in
its own name as Indenture Trustee, (iii) such holder or holders have
offered such Indenture Trustee satisfactory indemnity, (iv) such Indenture
Trustee has for 60 days failed to institute such proceeding, and (v) no
direction inconsistent with such written request has been given to such
Indenture Trustee during such 60-day period by the holders of a majority in
principal amount of such outstanding Notes.
With respect to any Trust, neither the related Indenture Trustee nor
the related Trustee in its individual capacity, nor any holder of a
Certificate representing an ownership interest in such Trust nor any of
their respective owners, beneficiaries, agents, officers, directors,
employees, affiliates, successors or assigns will, in the absence of an
express agreement to the contrary, be personally liable for the payment of
the principal of or interest on the related Notes or for the agreements of
such Trust contained in the applicable Indenture.
Certain Covenants
Each Indenture will provide that the related Trust may not
consolidate with or merge into any other entity, unless (i) the entity
formed by or surviving such consolidation or merger is organized under the
laws of the United States or any state, (ii) such entity expressly assumes
such Trust's obligation to make due and punctual payments upon the Notes of
the related series and the performance or observance of every agreement and
covenant of such Trust under the Indenture, (iii) no Event of Default shall
have occurred and be continuing immediately after such merger or
consolidation, (iv) such Trust has been advised that the rating of the
Notes or the Certificates of such series then in effect would not be
reduced or withdrawn by the Rating Agency as a result of such merger or
consolidation, (v) such Trust has received an opinion of counsel to the
effect that such consolidation or merger would have no material adverse tax
consequence to the Trust or to any related Noteholder or Certificateholder,
and (vi) any action necessary to maintain the lien and security interest
under the Indenture has been taken.
Each Trust will not, among other things, (i) except as expressly
permitted by the applicable Indenture, the applicable Transfer and
Servicing Agreements or certain related documents with respect to such
Trust (collectively, the "Related Documents"), sell, transfer, exchange or
otherwise dispose of any of the assets of such Trust, (ii) claim any credit
on or make any deduction from the principal and interest payable in respect
of the Notes of the related series (other than amounts withheld under the
Code or applicable state law) or assert any claim against any present or
former holder of such Notes because of the payment of taxes levied or
assessed upon such Trust, (iii) permit the validity or effectiveness of the
related Indenture to be impaired or permit any person to be released from
any covenants or obligations with respect to such Notes under such
Indenture except as may be expressly permitted thereby, (iv) permit any
lien, charge, excise, claim, security interest, mortgage or other
encumbrance (other than certain liens that arise by operation of law) to be
created on or extend to or otherwise arise upon or burden the assets of
such Trust or any part thereof, or any interest therein or the proceeds
thereof, or (v) permit the lien of the related Indenture not to constitute
a valid first priority (other than certain liens that arise by operation of
law) security interest in the assets of such Trust.
<PAGE>
No Trust may engage in any activity other than as specified under the
section of the related Prospectus Supplement entitled "The Trust." No Trust
will incur, assume or guarantee any indebtedness other than indebtedness
incurred pursuant to the related Notes and the related Indenture or
otherwise in accordance with the Related Documents.
Satisfaction and Discharge of Indenture. An Indenture will be
discharged with respect to the collateral securing the related Notes upon
the delivery to the related Indenture Trustee for cancellation of all such
Notes or, with certain limitations, upon deposit with such Indenture
Trustee of funds sufficient for the payment in full of all such Notes.
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The Indenture Trustee
The Indenture Trustee for a series of Notes will be specified in the
related Prospectus Supplement. The Indenture Trustee for any series may
resign at any time, in which event the issuer with respect to each series
of Securities (the "Issuer") will be obligated to appoint a successor
trustee for such series. The Issuer may also remove any such Indenture
Trustee if such Indenture Trustee ceases to be eligible to continue as such
under the related Indenture or if such Indenture Trustee becomes insolvent.
In such circumstances, the Issuer will be obligated to appoint a successor
trustee for the applicable series of Notes. Any resignation or removal of
the Indenture Trustee and appointment of a successor trustee for any series
of Notes does not become effective until acceptance of the appointment by
the successor trustee for such series.
DESCRIPTION OF THE CERTIFICATES
General
With respect to each Trust, one or more classes of Certificates of
the related series will be issued pursuant to the terms of a Trust
Agreement or a Pooling and Servicing Agreement, a form of each of which has
been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. The following summary, together with the related
summary in the Prospectus Supplement for a particular Trust, describes all
of the material terms and provisions of Certificates and the Trust
Agreement or the Pooling and Servicing Agreement, as applicable, but it
does not purport to be complete and is subject to, and is qualified by
reference to, all the provisions of the Certificates and the Trust
Agreement or Pooling and Servicing Agreement, as applicable.
Except for the Certificates, if any, of a given series purchased by
the Seller, each class of Certificates will initially be represented by one
or more Certificates registered in the name of the Depository, except as
set forth below. See "Certain Information Regarding the Securities --
Definitive Securities." Except for the Certificates, if any, of a given
series purchased by the Seller, the Certificates will be available for
purchase in minimum denominations specified in the related Prospectus
Supplement, or if not so specified, in denominations of $1,000 and integral
multiples of $1,000 in excess thereof. Certificates may be issued in
book-entry form or as Definitive Certificates and if not otherwise
specified in the related Prospectus Supplement will be available in
book-entry form only. As to the Certificates issued in book-entry form, the
Seller has been informed by DTC that DTC's nominee will be Cede, unless
another nominee is specified in the related Prospectus Supplement.
Accordingly, such nominee is expected to be the holder of record of the
Certificates of any series that are not purchased by the Seller. Unless and
until Definitive Certificates are issued in replacement for book-entry
Certificates under the limited circumstances described herein or in the
related Prospectus Supplement, no beneficial owner of Certificates (each a
"Certificate Owner") (other than the Seller) will be entitled to receive a
physical certificate representing a Certificate. See "Certain Information
Regarding the Securities -- Definitive Securities." As to Certificates
issued in book-entry form, all references herein and in the related
Prospectus Supplement to actions by Certificateholders refer to actions
taken by DTC upon instructions from the Participants and all references
herein and in the related Prospectus Supplement to distributions, notices,
reports and statements to Certificateholders refer to distributions,
notices, reports and statements to DTC or its nominee, as the case may be,
as the registered holder of the Certificates, for distribution to
Certificateholders in accordance with DTC's procedures with respect
thereto. See "Certain Information Regarding the Securities -- Book-Entry
Registration" and "-- Definitive Securities." Any Certificates of such
series owned by the Seller or its affiliates will be entitled to equal and
proportionate benefits under the applicable Trust Agreement, except that
such Certificates will be deemed not to be outstanding for the purpose of
determining whether the requisite percentage of Certificateholders have
given any request, demand, authorization, direction, notice, consent or
other action under the Related Documents (other than the commencement by
the related Trust of a voluntary proceeding in bankruptcy as described
under "Description of the Transfer and Servicing Agreements--Insolvency
Event").
<PAGE>
Distributions of Principal and Interest
The timing and priority of distributions, seniority, allocations of
losses, Certificate Rate and amount of or method of determining
distributions with respect to principal and interest of each class of
Certificates will be described in the related Prospectus Supplement.
Distributions of interest on such Certificates other than certain Strip
Certificates will be made on the dates specified in the related Prospectus
Supplement (each, a "Payment
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Date") and will be made prior to distributions with respect to principal of
such Certificates. To the extent provided in the related Prospectus
Supplement, a series may include one or more classes of Certificates
("Strip Certificates," and, together with Strip Notes, "Strip Securities")
entitled to (i) distributions in respect of principal with
disproportionate, nominal or no interest distributions, or (ii) interest
distributions with disproportionate, nominal or no distributions in respect
of principal. Each class of Certificates may have a different Certificate
Rate, which may be a fixed, variable or adjustable Certificate Rate (and
which may be zero for certain classes of Strip Certificates) or any
combination of the foregoing. The related Prospectus Supplement will
specify the Certificate Rate for each class of Certificates of a given
series or the method for determining such Certificate Rate. See also
"Certain Information Regarding the Securities--Fixed Rate Securities" and
"--Floating Rate Securities." If a series of Securities includes classes of
Notes, such Notes and Certificates will be issued by the same Trust and
payable from the same Trust property, to the extent specified in the
related Prospectus Supplement, distributions in respect of the Certificates
of such series will be subordinate to payments in respect of the Notes of
such series to the extent provided in the related Prospectus Supplement.
Distributions in respect of interest on and principal of any class of
Certificates will be made on a pro rata basis among all the
Certificateholders of such class.
In the case of a series of Certificates which includes two or more
classes of Certificates, the timing, sequential order, priority of payment
or amount of distributions in respect of interest and principal, and any
schedule or formula or other provisions applicable to the determination
thereof, of each such class shall be as set forth in the related Prospectus
Supplement.
To the extent specified in the related Prospectus Supplement, the
principal amount of Certificates outstanding at any time may be reduced to
reflect losses on the Receivables experienced prior to such time.
CERTAIN INFORMATION REGARDING THE SECURITIES
Fixed Rate Securities
Each class of Securities (other than certain classes of Strip Notes
or Strip Certificates) may bear interest at a fixed rate per annum ("Fixed
Rate Securities") or at a variable or adjustable rate per annum ("Floating
Rate Securities"), as more fully described below and in the related
Prospectus Supplement. Each class of Fixed Rate Securities will bear
interest at the applicable per annum Interest Rate or Certificate Rate, as
the case may be, specified in the related Prospectus Supplement. Interest
on each class of Fixed Rate Securities will be computed on the basis of a
360-day year of twelve 30-day months or on such other day count basis as is
specified in the applicable Prospectus Supplement. See "Description of the
Notes--Principal and Interest on the Notes" and "Description of the
Certificates-- Distributions of Principal and Interest."
Floating Rate Securities
Each class of Floating Rate Securities will bear interest for each
applicable Interest Reset Period (as such term is defined in the related
Prospectus Supplement with respect to a class of Floating Rate Securities,
"Interest Reset Period") at a rate per annum determined by reference to an
interest rate basis (the "Base Rate"), plus or minus the Spread, if any, or
multiplied by the Spread Multiplier, if any, in each case as specified in
the related Prospectus Supplement. The "Spread" is the number of basis
points (one basis point equals one-hundredth of a percentage point) that
may be specified in the applicable Prospectus Supplement as being
applicable to such class, and the "Spread Multiplier" is the percentage
that may be specified in the applicable Prospectus Supplement as being
applicable to such class.
<PAGE>
The applicable Prospectus Supplement will designate a Base Rate for a
given Floating Rate Security based on the London interbank offered rate
("LIBOR"), commercial paper rates, Federal funds rates, U.S. Government
treasury securities rates, negotiable certificates of deposit rates or
another rate as set forth in such Prospectus Supplement.
As specified in the applicable Prospectus Supplement, Floating Rate
Securities of a given class may also have either or both of the following
(in each case expressed as a rate per annum): (i) a maximum limitation, or
ceiling, on the rate at which interest may accrue during any interest
period and (ii) a minimum limitation, or floor, on the rate at which
interest may accrue during any interest period. In addition to any maximum
interest rate that
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may be applicable to any class of Floating Rate Securities, the interest
rate applicable to any class of Floating Rate Securities will in no event
be higher than the maximum rate permitted by applicable law, as the same
may be modified by United States law of general application.
Each Trust with respect to which a class of Floating Rate Securities
will be issued will appoint, and enter into agreements with, a calculation
agent (each, a "Calculation Agent") to calculate interest rates on each
such class of Floating Rate Securities issued with respect thereto. The
applicable Prospectus Supplement will set forth the identity of the
Calculation Agent for each such class of Floating Rate Securities of a
given series, which may be either the Trustee or Indenture Trustee with
respect to such series. All determinations of interest by the Calculation
Agent shall, in the absence of manifest error, be conclusive for all
purposes and binding on the holders of Floating Rate Securities of a given
class. All percentages resulting from any calculation of the rate of
interest on a Floating Rate Security will be rounded, if necessary, in the
manner specified in the related Prospectus Supplement or, if not so
specified to the nearest 1/100,000 of 1% (.0000001), with five
one-millionths of a percentage point rounded upward.
Book-Entry Registration
With respect to each class of Securities of a given series issued in
book-entry form, Securityholders may hold their Securities through DTC (in
the United States) or Cedel or Euroclear (in Europe) if they are
participants of such systems, or indirectly through organizations that are
participants in such systems. DTC's Nominee will hold the global
Securities. Cedel and Euroclear will hold omnibus positions on behalf of
the Cedel Participants and the Euroclear Participants, respectively,
through customers' securities accounts in Cedel's and Euroclear's names on
the books of their respective depositories (collectively, the
"Depositaries") which in turn will hold such positions in customers'
securities accounts in the Depositaries' names on the books of DTC. For
additional information regarding clearance and settlement procedures see
Annex I hereto.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC holds securities for its Participants ("DTC
Participants") and facilitates the clearance and settlement among DTC
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic book-entry changes in DTC
Participants' accounts, thereby eliminating the need for physical movement
of securities certificates. DTC Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to the DTC system is also available to
others such as securities brokers and dealers, banks, and trust companies
that clear through or maintain a custodial relationship with a DTC
Participant, either directly or indirectly ("Indirect Participants"). The
rules applicable to DTC and DTC Participants are on file with the
Securities and Exchange Commission.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Cedel Participants and Euroclear Participants will
occur in the ordinary way in accordance with their applicable rules and
operating procedures.
<PAGE>
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in
DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by its Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established
deadlines (European time). The relevant European international clearing
system will, if the transaction meets its settlement requirements, deliver
instructions to its Depositary to take action to effect final settlement on
its behalf by delivering or receiving securities in DTC, and making or
receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Cedel Participants and Euroclear Participants
may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities in Cedel or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business
day following the DTC settlement date, and such credits or any transactions
in such securities settled during such
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processing will be reported to the relevant Cedel Participant or Euroclear
Participant on such business day. Cash received in Cedel or Euroclear as a
result of sales of securities by or through a Cedel Participant or a
Euroclear Participant to a DTC Participant will be received with value on
the DTC settlement date but will be available in the relevant Cedel or
Euroclear cash account only as of the business day following settlement in
DTC.
Purchases of Securities under the DTC system must be made by or
through DTC Participants, which will receive a credit for the Securities on
DTC's records. The ownership interest of each actual Security Owner is in
turn to be recorded on the DTC Participants' and Indirect Participants'
records. Security Owners will not receive written confirmation from DTC of
their purchase, but Security Owners are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the DTC Participant or Indirect
Participant through which the Security Owner entered into the transaction.
Transfers of ownership interests in the Securities are to be accomplished
by entries made on the books of DTC Participants acting on behalf of
Security Owners. Security Owners will not receive certificates representing
their ownership interest in Securities, except in the event that use of the
book-entry system for the Securities is discontinued. Except to the extent
Seller holds Certificates with respect to any series of Securities, it is
anticipated that the only "Securityholder", "Noteholder" and
"Certificateholder" will be DTC's Nominee. Note Owners will not be
recognized by each Indenture Trustee as Noteholders, as such term is used
in each Indenture, and Note Owners will be permitted to exercise the rights
of Noteholders only indirectly through DTC and DTC Participants. Similarly,
Certificate Owners will not be recognized by each Trustee as
Certificateholders as such term is used in each Trust Agreement or Pooling
and Servicing Agreement, and Certificate Owners will be permitted to
exercise the rights of Certificateholders only indirectly through DTC and
DTC Participants.
To facilitate subsequent transfers, all Securities deposited by DTC
Participants with DTC are registered in the name of DTC's Nominee. The
deposit of Securities with DTC and their registration in the name of DTC's
Nominee effects no change in beneficial ownership. DTC has no knowledge of
the actual Security Owners of the Securities; DTC's records reflect only
the identity of the DTC Participants to whose accounts such Securities are
credited, which may or may not be the Security Owners. The DTC Participants
will remain responsible for keeping account of their holdings on behalf of
their customers.
Conveyance of notices and other communications by DTC to DTC
Participants, by DTC Participants to Indirect Participants, and by DTC
Participants and Indirect Participants to Security Owners will be governed
by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Neither DTC nor DTC's Nominee will consent or vote with respect to
Securities. Under its usual procedures, DTC mails an omnibus proxy to the
issuer as soon as possible after the record date, which assigns DTC's
Nominees's consenting or voting rights to those DTC Participants to whose
accounts the Securities are credited on the record date (identified in a
listing attached thereto).
<PAGE>
Principal and interest payments on the Securities will be made to
DTC. DTC's practice is to credit Participants' accounts on the applicable
Payment Date in accordance with their respective holdings shown on DTC's
records unless DTC has reason to believe that it will not receive payment
on such Payment Date. Payments by DTC Participants to Security Owners will
be governed by standing instructions and customary practices, as is the
case with securities held for the accounts of customers in bearer form or
registered in "street name" and will be the responsibility of such DTC
Participant and not of DTC, the related Indenture Trustee or the related
Trustee, as applicable or the Seller, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
principal and interest to DTC is the responsibility of the applicable
Trustee, disbursement of such payments to DTC Participants shall be the
responsibility of DTC, and disbursement of such payments to Security Owners
shall be the responsibility of DTC Participants and Indirect Participants.
Under a book-entry format, Securityholders may experience some delay in
their receipt of payments, since such payments will be forwarded by the
applicable Trustee to DTC's Nominee. DTC will forward such payments to DTC
Participants which thereafter will forward them to Indirect Participants or
Security Owners.
Because DTC can only act on behalf of DTC Participants, who in turn
act on behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions with respect to
such Securities, may be limited due to the lack of a physical certificate
for such Securities.
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<PAGE>
DTC has advised the Seller that it will take any action permitted to
be taken by a Noteholder under the related Indenture or a Certificateholder
under the related Trust Agreement or Pooling and Servicing Agreement only
at the direction of one or more DTC Participants to whose accounts with DTC
the applicable Notes or Certificates are credited. DTC may take conflicting
actions with respect to other undivided interests to the extent that such
actions are taken on behalf of Participants whose holdings include such
undivided interests.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that the Seller believes to be
reliable, but the Seller takes no responsibility for the accuracy thereof.
Cedel Bank, societe anonyme ("Cedel") is incorporated under the laws
of Luxembourg as a professional depository. Cedel holds securities for its
participating organizations ("Cedel Participants") and facilitates the
clearance and settlement of securities transactions between Cedel
Participants through electronic book-entry changes in accounts of Cedel
Participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in Cedel in any of 32 currencies,
including United States dollars. Cedel provides to its Cedel Participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Cedel interfaces with domestic markets in several countries. As
a professional depository, Cedel is subject to regulation by the Luxembourg
Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers
and dealers, banks, trust companies, clearing corporations and certain
other organizations and may include the underwriters of any series of
Securities. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a Cedel Participant, either directly or
indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to
clear and settle transactions between Euroclear Participants through
simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk
from lack of simultaneous transfers of securities and cash. Transactions
may now be settled in any of 32 currencies, including United States
dollars. The Euroclear System includes various other services, including
securities lending and borrowing and interfaces with domestic markets in 25
countries generally similar to the arrangements for cross-market transfers
with DTC described above. The Euroclear System is operated by Morgan
Guaranty Trust Company of New York, Brussels, Belgium office (the
"Euroclear Operator" or "Euroclear"), under contract with Euroclear
Clearance System, Societe Cooperative, a Belgian cooperative corporation
(the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear
cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative Board establishes policy for the Euroclear
System. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial
intermediaries and may include the underwriters of any series of
Securities. Indirect access to the Euroclear System is also available to
other firms that maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such,
it is regulated and examined by the Board of Governors of the Federal
Reserve System and the New York State Banking Department, as well as the
Belgian Banking Commission.
<PAGE>
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments
with respect to securities in the Euroclear System. All securities in the
Euroclear System are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The
Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Securities held through Cedel or
Euroclear will be credited to the cash accounts of Cedel Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. Such distributions
will be subject to tax reporting in accordance with relevant United States
tax laws and regulations. See "Material Federal Income Tax Consequences."
Cedel or the
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Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Securityholder under a related Agreement on
behalf of a Cedel Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to its Depositary's
ability to effect such actions on its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among
participants of DTC, Cedel and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time. Under such circumstances, in the event that a
successor securities depository for DTC is not obtained, Definitive
Securities are required to be printed and delivered. The Seller may decide
to discontinue use of the system of book-entry transfers through DTC (or a
successor securities depository). In that event, Definitive Securities will
be delivered to Securityholders. See "--Definitive Securities."
NONE OF THE TRUST, THE SELLER, PARAGON, THE SERVICER, ANY
SUBSERVICER, ANY APPLICABLE TRUSTEE NOR ANY OF THE UNDERWRITERS WILL HAVE
ANY RESPONSIBILITY OR OBLIGATION TO ANY DTC PARTICIPANTS, CEDEL
PARTICIPANTS OR EUROCLEAR PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS
NOMINEES WITH RESPECT TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC,
CEDEL, EUROCLEAR OR ANY PARTICIPANT, (2) THE PAYMENT BY DTC, CEDEL,
EUROCLEAR OR ANY PARTICIPANT OF ANY AMOUNT DUE TO ANY SECURITY OWNER IN
RESPECT OF THE PRINCIPAL BALANCE OF, OR INTEREST ON, THE SECURITIES, (3)
THE DELIVERY BY ANY DTC PARTICIPANT, CEDEL PARTICIPANT, OR EUROCLEAR
PARTICIPANT OF ANY NOTICE TO ANY SECURITY OWNER WHICH IS REQUIRED OR
PERMITTED UNDER THE TERMS OF THE APPLICABLE AGREEMENTS TO BE GIVEN TO
SECURITYHOLDERS OR (4) ANY OTHER ACTION TAKEN BY DTC OR DTC'S NOMINEE AS
THE SECURITYHOLDER.
Definitive Securities
With respect to any series of Notes and any series of Certificates
issued in book-entry form, such Notes or Certificates will be issued in
fully registered, certificated form ("Definitive Notes" and "Definitive
Certificates", respectively, and collectively referred to herein as
"Definitive Securities") to Noteholders or Certificateholders or their
respective nominees, rather than to DTC or its nominee, if the related
Prospectus Supplement so provides with respect to the initial issuance of
any such Securities thereunder and, if the related Prospectus Supplement
does not so provide, only if (i) Seller advises the related Trustee that
DTC is no longer willing or able to discharge properly its responsibilities
as depository with respect to such Securities and such Trustee is unable to
locate a qualified successor, (ii) the Seller at its option, advises the
related Trustee that it elects to terminate the book-entry system through
DTC, or (iii) after the occurrence of an Event of Default or a Servicer
Termination Event with respect to such Securities, holders representing at
least a majority of the outstanding principal amount of the Notes or the
Certificates, as the case may be, of such series advise the applicable
Trustee and DTC through its Participants in writing that the continuation
of a book-entry system through DTC (or a successor thereto) with respect to
such Notes or Certificates is no longer in the best interest of the holders
of such Securities.
Upon the occurrence of any event described in the immediately
preceding paragraph, the applicable Trustee will be required to notify all
applicable Security Owners of a given series through Participants of the
availability of Definitive Securities. Upon surrender by DTC of the
definitive certificates representing the corresponding Securities and
receipt of instructions for re-registration, the applicable Trustee will
reissue such Securities as Definitive Securities to such Securityholders.
<PAGE>
Distributions of principal of, and interest on, Definitive Securities
will be made by the applicable Trustee in accordance with the procedures
set forth in the related Indenture or the related Trust Agreement or
Pooling and Servicing Agreement, as applicable, directly to holders of
Definitive Securities in whose names the Definitive Securities were
registered at the close of business on the applicable record date specified
for such Securities in the related Prospectus Supplement. Such
distributions will be made by check mailed to the address of such holder as
it appears on the register maintained by the applicable Trustee. The final
payment on any such Definitive Security, however, will be made only upon
presentation and surrender of such Definitive Security at the office or
agency specified in the notice of final distribution to the applicable
Securityholders.
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Definitive Securities will be transferable and exchangeable at the
offices of the applicable Trustee or of a registrar named in a notice
delivered to holders of Definitive Securities. No service charge will be
imposed for any registration of transfer or exchange, but the applicable
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection therewith.
List of Securityholders
Three or more holders of Notes of a given series or one or more
holders of such Notes evidencing not less than 25% of the aggregate
outstanding principal balance of such Notes may, by written request to the
related Indenture Trustee, obtain access to the list of all Noteholders of
such series maintained by such Indenture Trustee for the purpose of
communicating with other Noteholders with respect to their rights under the
related Indenture or under such Notes. Unless Definitive Notes have been
issued, the only "Noteholder" appearing on the list maintained by the
related Indenture Trustee will be Cede, as nominee for DTC. In such
circumstances, any Note Owner wishing to communicate with other Note Owners
will not be able to identify those Note Owners through the Indenture
Trustee and instead will have to attempt to identify them through DTC and
its Participants or such other means as such Note Owner may find available.
Three or more holder of Notes of a given series or one or more
holders of such Certificates evidencing not less than 25% of the
Certificate Balance of such Certificates may, by written request to the
related Trustee, obtain access to the list of all Certificateholders of
such series maintained by such Trustee for the purpose of communicating
with other Certificateholders with respect to their rights under the
related Trust Agreement or Pooling and Servicing Agreement or under such
Certificates. Unless Definitive Certificates have been issued, the only
"Certificateholder" appearing on the list maintained by the related Trustee
will be Cede, as nominee for DTC. In such circumstances, any Certificate
Owner wishing to communicate with other Certificate Owners will not be able
to identify those Certificate Owners through the Trustee and instead will
have to attempt to identify them through DTC and its Participants or such
other means as such Certificate Owner may find available.
Reports to Securityholders
With respect to each series of Securities, on or prior to each
Payment Date, the Servicer will prepare and provide to the related Trustee
a statement to be delivered to the related Securityholders. With respect to
each series of Securities, each such statement to be delivered to
Noteholders will include (to the extent applicable) the following
information (and any other information so specified in the related
Prospectus Supplement) as to the Notes of such series with respect to such
Payment Date or the period since the previous Payment Date, as applicable,
and each such statement to be delivered to Certificateholders will include
(to the extent applicable) the following information (and any other
information so specified in the related Prospectus Supplement) as to the
Certificates of such series with respect to such Payment Date or the period
since the previous Payment Date, as applicable:
(i) the amount of the distribution allocable to interest on
or with respect to each class of Securities of such series;
(ii) the amount of the distribution allocable to principal of
each class of Securities of such series;
(iii) the amount of the distribution allocable to draws from
the Reserve Account (if any), any Yield Supplement Account or
payments in respect of any other credit or cash flow enhancement
arrangement;
(iv) the balance of any Yield Supplement Account or the
Reserve Account (if any) on such date, after giving effect to changes
therein on such date;
(v) the amount of fees paid by the Trust with respect to such
Collection Period;
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(vi) the aggregate outstanding principal balance and the Note
Pool Factor for each class of such Notes, and the Certificate Balance
and the Certificate Pool Factor for each class of such Certificates,
each after giving effect to all payments reported under clause (ii)
above on such date;
(vii) the Noteholders' Interest Carryover Shortfall, the
Noteholders' Principal Carryover Shortfall, the Certificateholders'
Interest Carryover Shortfall and the Certificateholders' Principal
Carryover Shortfall (each as defined in the related Prospectus
Supplement), if any, in each case as applicable to each class of
Securities, and the change in such amounts from the preceding
statement;
(viii) the Interest Rate or Certificate Rate for the next
period for any class of Notes or Certificates of such series with
variable or adjustable rates;
(ix) for each such date during the Funding Period (if any),
the remaining Pre-Funded Amount;
(x) for the first such date that is on or immediately
following the end of the Funding Period (if any), the amount of any
remaining Pre-Funded Amount that has not been used to fund the
purchase of Subsequent Receivables and is being passed through as
payments of principal on the Securities of such series;
(xi) to the extent provided in the related Prospectus
Supplement, the amount of advances made by the Servicer, if any, on
such date; and
(xii) such other information as may be specified in the
related Prospectus Supplement.
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year during the term of each Trust, the applicable
Trustee will mail to each person who at any time during such calendar year
has been a Securityholder with respect to such Trust and received any
payment thereon a statement containing certain information for the purposes
of such Securityholder's preparation of federal income tax returns. See
"Material Federal Income Tax Consequences."
Funding Period or Revolving Period
If specified in the related Prospectus Supplement, during a Funding
Period and/or Revolving Period, the Pre- Funding Account and/or Revolving
Account will be maintained as a trust account in the name of the applicable
Trustee. The Pre-Funded Amount will initially equal the amount specified in
the related Prospectus Supplement, which may be up to 100% of the aggregate
principal amount of the series of Securities offered thereunder. During the
Funding Period, the Pre-Funded Amount will be reduced by the amount thereof
used to purchase Subsequent Receivables in accordance with the applicable
Transfer and Servicing Agreement and the amounts thereof deposited in the
Reserve Account in connection with the purchase of such Subsequent
Receivables.
Prior to being used to purchase Subsequent Receivables or paid to the
Noteholders and Certificateholders, the Pre-Funded Amount and amounts on
deposit in the Revolving Account will be invested from time to time in
Permitted Investments. See "Description of the Transfer and Servicing
Agreements--Accounts."
If the initial Pre-Funded Amount exceeds 25% of the aggregate
proceeds from the sale of Securities, the actual investments of the
Pre-Funding Amount as of the end of each month will be provided in Current
Reports on Form 8-K to be filed by the Seller with respect to the
applicable Trust.
<PAGE>
If specified in the related Prospectus Supplement for a Trust that
issues Notes, during a Revolving Period, the applicable Trustee will
deposit in the related Revolving Account the principal collections on the
related Receivables as described above. In addition, on each Payment Date
during the Revolving Period, the applicable Trustee will deposit in the
related Revolving Account any other amount described in the related
Prospectus Supplement. Funds on deposit in a Revolving Account will be
withdrawn from time to time during the related Revolving Period for
delivery to the Seller in exchange for the transfer and assignment of
Subsequent Receivables to the related Trust in the manner specified in the
related Prospectus Supplement. In addition, on the Payment Date following
the end of the related Revolving Period, the applicable Trustee will
transfer the amount, if any, on deposit in the related Revolving Account at
the close of business on the last day of such
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Revolving Period, less any investment earnings on deposit therein, to the
related Collection Account for distribution to the related Securityholders
on such Payment Date. In addition, on each Payment Date during the related
Revolving Period, the applicable Trustee will transfer to the related
Collection Account for distribution to the related Securityholders on such
Payment Date the amount, if any, by which the amount on deposit in the
related Revolving Account at the close of business on the last day of the
preceding calendar month, less any investment earnings on deposit therein,
exceeds the maximum permitted Revolving Account balance specified in the
related Prospectus Supplement.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes the material terms of each Sale and
Servicing Agreement between the Seller, the Servicer and the Trust (as
amended and supplemented from time to time, the "Sale and Servicing
Agreement") or Pooling and Servicing Agreement between the Seller, the
Servicer and the Trustee (as amended and supplemented from time to time,
the "Pooling and Servicing Agreement" and, together with the Sale and
Servicing Agreement, each a "Transfer and Servicing Agreement") pursuant to
which a Trust will purchase Receivables from the Seller and the Servicer
will agree to service such Receivables and each Trust Agreement (in the
case of a grantor trust, the Pooling and Servicing Agreement) pursuant to
which a Trust will be created and Certificates will be issued and pursuant
to which the Trustee will undertake certain administrative duties with
respect to a Trust that issues Notes. Forms of each type of the Transfer
and Servicing Agreements and the Trust Agreement have been filed as
exhibits to the Registration Statement of which this Prospectus forms a
part. This summary does not purport to be complete and is subject to, and
qualified by reference to, all the provisions of the Transfer and Servicing
Agreements and the Trust Agreement.
Sale and Assignment of Receivables
Prior to or at the time of issuance of the Securities of a given
Trust, pursuant to a related Purchase Agreement, Paragon will sell and
assign to the Seller, without recourse, its entire interest in the Initial
Receivables, of the related Receivables Pool, including its security
interests in the related Financed Vehicles. The Seller will, if so
specified in the related Prospectus Supplement, transfer and assign to the
applicable Trustee, without recourse, pursuant to a Transfer and Servicing
Agreement, its entire interest in the Initial Receivables, if any, of the
related Receivables Pool, including its security interests in the related
Financed Vehicles. The Trustee will not independently verify the existence
and qualification of any Receivables. The Trustee will, concurrently with
such sale and assignment, execute, authenticate, and deliver the related
Notes and/or Certificates to the Seller in exchange for the Receivables.
Each such Receivable will be identified in a schedule delivered pursuant to
such Transfer and Servicing Agreement (a "Schedule of Receivables"). The
net proceeds received by the Seller from the sale of the Certificates and
the Notes of a given series will be applied to the purchase of the related
Receivables from Paragon and, to the extent specified in the related
Prospectus Supplement, to the repayment of any Warehouse Financing or
deposit of the Pre-Funded Amount into the Pre- Funding Account and to make
any required initial deposit in any Reserve Account. The related Prospectus
Supplement for a given Trust will specify whether, and the terms,
conditions and manner under which, Subsequent Receivables will be sold by
the Seller to the applicable Trust from time to time during any Funding
Period on each date specified as a transfer date in the related Prospectus
Supplement (each, a "Subsequent Transfer Date").
The purchase price for the Receivables purchased by the Trust from
the Seller and by the Seller from Paragon may be more or less than the
aggregate principal balance thereof. If any Receivables are purchased for a
purchase price less than their respective principal balances, a portion of
the collections or proceeds in respect of principal from such Receivables
may be deemed collections or proceeds in respect of interest on such
Receivables for the purposes of allocating distributions on the Securities.
<PAGE>
If so specified in the related Prospectus Supplement, a Trust may
acquire Initial Receivables pursuant to Warehouse Financing arrangements
entered into prior to the issuance by that Trust of any Securities offered
hereby. It will be a condition to the issuance of Securities by any such
Trust that any Warehouse Financing with respect to the Pool Receivables be
repaid in full, and any related security interests released, at or prior to
the time of such issuance.
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In each Purchase Agreement, Paragon will represent and warrant to the
Seller and in each Transfer and Servicing Agreement, the Seller will
represent and warrant to the applicable Trust, among other things, among
other things: (i) as of the Closing Date, the information provided in the
schedule to the Sale and Servicing Agreement with respect to the
Receivables is correct in all material respects; (ii) as of the Cutoff Date
or the applicable Subsequent Transfer Date, if any, the Receivables are
free and clear of all liens or claims existing or that have been filed for
work, labor, storage or materials that are liens prior to the security
interest in the Financed Vehicle granted by the Receivables and no right of
setoff, counterclaim or rescission has been asserted or threatened with
respect to the Receivables; (iii) at the date of issuance of the
Securities, each of the Receivables is secured by (or will be when all
necessary steps have been taken to result in) a first priority perfected
security interest in the Financed Vehicle in favor of Paragon; (iv) none of
the Receivables contravenes in any material respects any requirements of
applicable federal, state and local laws, including consumer credit, truth
in lending, equal credit opportunity and disclosure laws; and (v) any other
representations and warranties that may be described in the related
Prospectus Supplement.
As of the last day of the month that includes the sixtieth day (or if
the Seller elects, earlier) following the discovery by or notice to the
Seller of a breach of any representation or warranty of the Seller that
materially and adversely affects the interests of the related Trust in any
Receivable, the Seller, unless the breach is cured, will repurchase such
Receivable from such Trust at a price equal to the amount of principal plus
accrued interest calculated in accordance with the Servicer's customary
practices for such Receivable, after giving effect to the receipt of any
moneys collected (from whatever source) on such Receivable, if any (the
"Purchase Amount"). The repurchase obligation constitutes the sole remedy
available to the Certificateholders or the Trustee and any Noteholders or
Indenture Trustee in respect of such Trust for any such uncured breach.
Unless otherwise specified in the related Prospectus Supplement, to
assure uniform quality in servicing the Receivables and to reduce
administrative costs, the Seller and each Trust will designate the Servicer
or Paragon as custodian to maintain possession, as such Trust's agent, of
the related motor vehicle retail installment sales contract or promissory
note and security agreement and any other documents relating to the
Receivables. The Receivables will not be segregated, stamped or otherwise
marked to indicate that they have been sold to the related Trust. The
accounting records and computer systems of Paragon, the Servicer and the
Seller will reflect the sales and assignments of the related Receivables to
the Seller or a Trust, as applicable, and Uniform Commercial Code ("UCC")
financing statements reflecting such sales and assignments will be filed.
If through inadvertence or otherwise, another party purchases (or takes a
security interest in) the Receivables for new value in the ordinary course
of business and takes possession of the Receivables without actual
knowledge of the related Trust's interest, the purchaser (or secured party)
will acquire an interest in the Receivables superior to the interest of the
related Trust. See "Certain Legal Aspects of the Receivables--Security
Interest in Vehicles."
<PAGE>
Accounts
With respect to each Trust that issues Notes, the Servicer will
establish and maintain with the related Indenture Trustee one or more
accounts, in the name of the Indenture Trustee on behalf of the related
Noteholders and Certificateholders, into which all payments made on or with
respect to the related Receivables will be deposited (the "Collection
Account"). The Servicer will establish and maintain with such Indenture
Trustee an account, in the name of such Indenture Trustee on behalf of such
Noteholders, into which amounts released from the Collection Account and
any Pre-Funding Account, Revolving Account, Reserve Account or other credit
enhancement for payment to such Noteholders will be deposited and from
which all distributions to such Noteholders will be made (the "Note
Distribution Account"). The Servicer will establish and maintain with the
related Trustee one or more accounts, in the name of such Trustee on behalf
of such Certificateholders, into which amounts released from the Collection
Account and any Pre-Funding Account, Revolving Account, Reserve Account or
other credit or cash flow enhancement for distribution to such
Certificateholders will be deposited and from which all distributions to
such Certificateholders will be made (each, a "Certificate Distribution
Account"). With respect to each Trust that does not issue Notes, the
Servicer will also establish and maintain the Collection Account and any
other Trust Account in the name of the related Trustee on behalf of the
related Certificateholders.
If so provided in the related Prospectus Supplement, the Servicer
will establish an additional account (the "Payahead Account"), into which,
to the extent required by the applicable Transfer and Servicing Agreement,
early payments by or on behalf of Obligors on Precomputed Receivables which
do not constitute scheduled
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payments, full prepayments, nor certain partial prepayments that result in
a reduction of the Obligor's periodic payment below the scheduled payment
as of the applicable Cutoff Date ("Payaheads") will be deposited until such
time as the payment falls due. Until such time as payments are transferred
from the Payahead Account to the Collection Account, they will not
constitute collected interest or collected principal and will not be
available for distribution to the applicable Noteholders or
Certificateholders. For each Trust that issues Notes, the Payahead Account
will initially be maintained with and in the name of the applicable
Indenture Trustee. With respect to each Trust that does not issue Notes,
the Servicer will establish and maintain with the related Trustee the
Payahead Account in the name of such Trustee. So long as Paragon is the
Servicer and provided that (i) there exists no Servicer Termination Event
and (ii) each other condition to holding Payaheads as may be required by
the applicable Transfer and Servicing Agreement is satisfied, Payaheads may
be retained by the Servicer until the applicable Payment Date.
Any other accounts to be established with respect to a Trust,
including any Pre-Funding Account, Revolving Account, Yield Supplement
Account (as such term is defined in the related Prospectus Supplement, the
"Yield Supplement Account") or Reserve Account, will be described in the
related Prospectus Supplement.
For any series of Securities, funds in the Collection Account, the
Note Distribution Account, the Certificate Distribution Account(s) and any
Pre-Funding Account, Revolving Account, Reserve Account and other accounts
identified as such in the related Prospectus Supplement (collectively, the
"Trust Accounts") will be invested as provided in the related Transfer and
Servicing Agreement in Permitted Investments.
"Permitted Investments" will be any Eligible Investments, except that
money market funds will not be Permitted Investments in the case of a
Pre-Funding Account unless the Indenture Trustee receives an opinion of
counsel to the effect that making such investments will not require the
related Trust to register as an investment company under the Investment
Company Act of 1940, as amended. "Eligible Investments" consist of (a)
direct interest-bearing obligations of, and interest-bearing obligations
guaranteed as to timely payment of principal and interest by, the United
States or any agency or instrumentality of the United States the
obligations of which are backed by the full faith and credit of the United
States; (b) demand or time deposits in, certificates of deposit of, demand
notes of, or bankers' acceptances issued by any depository institution or
trust company organized under the laws of the United States or any State
and subject to supervision and examination by federal and/or state banking
authorities (including, if applicable, the related Indenture Trustee or any
agent of the related Indenture Trustee acting in their respective
commercial capacities); provided, however, that the short-term unsecured
debt obligations of such depository institution or trust company at the
time of such investment, or contractual commitment providing for such
investment, are rated in one of the two highest short-term rating
categories by the Rating Agency; (c) repurchase obligations pursuant to a
written agreement (i) with respect to any obligation described in clause(a)
above, where the related Indenture Trustee has taken actual or constructive
delivery of such obligation in accordance with the applicable Indenture,
and (ii) entered into with a depository institution or trust company
organized under the laws of the United States or any State thereof, the
deposits of which are insured by the Federal Deposit Insurance Corporation
and the short-term unsecured debt obligations of which are rated in one of
the two highest short-term rating categories by the Rating Agency
(including, if applicable, the related Indenture Trustee, or any agent of
the related Indenture Trustee acting in its commercial capacity); (d)
securities bearing interest or sold at a discount issued by any corporation
incorporated under the laws of the United States or any State whose
long-term unsecured debt obligations are rated in one of the two highest
long-term rating categories by the Rating Agency at the time of such
investment or contractual commitment providing for such investment; (e)
commercial paper that (i) is payable in United States dollars and (ii) is
rated in one of the two highest short-term rating categories by the Rating
Agency; (f) money market mutual funds that are rated in the highest credit
rating category by at least one nationally recognized statistical rating
organization; or (g) any other demand or time deposit, obligation, security
or investment as may be acceptable to the Rating Agency, as evidenced by
the prior written consent of the Rating Agency.
<PAGE>
Permitted Investments generally are limited to obligations or
securities that mature on or before the date of the next distribution for
such series. However, to the extent permitted by the Rating Agency, funds
in any Reserve Account may be invested in securities that will not mature
prior to the date of the next distribution with respect to such
Certificates or Notes and will not be sold to meet any shortfalls. Thus,
the amount of cash in any Reserve Account at any time may be less than the
balance of the Reserve Account. If the amount required to be withdrawn from
any Reserve Account to cover shortfalls in collections on the related
Receivables (as provided
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in the related Prospectus Supplement) exceeds the amount of cash in the
Reserve Account, a temporary shortfall in the amounts distributed to the
related Noteholders or Certificateholders could result, which could, in
turn, increase the average life of the Notes or the Certificates of such
series. To the extent specified in the related Prospectus Supplement,
investment earnings on funds deposited in the Trust Accounts, net of losses
and investment expenses (collectively, "Investment Earnings"), will be
either retained in the applicable Trust Account or distributed to the
Servicer and not be treated as collections on the Receivables or otherwise
be available for Noteholders or Certificateholders.
The Trust Accounts will be maintained as Eligible Accounts. "Eligible
Account" means either (i) a segregated trust account that is maintained
with the corporate trust department of a depository institution, or (ii) a
segregated direct deposit account maintained with a depository institution
or trust company organized under the laws of the United States of America,
any of the States thereof or the District of Columbia having a certificate
of deposit, short-term deposit or commercial paper rating in one of the two
highest categories from the Rating Agency (or, if not rated by the Rating
Agency, from another nationally recognized statistical rating
organization).
Servicing Procedures
The Servicer will make reasonable efforts to collect all payments due
with respect to the Receivables held by any Trust and will, consistent with
the related Transfer and Servicing Agreement, follow such collection
procedures as it follows with respect to comparable motor vehicle retail
installment sales contracts and promissory note and security agreements it
services for itself or others. Consistent with its customary procedures,
the Servicer may, in its discretion, arrange with the Obligor on a
Receivable to extend, modify or amend the payment schedule, but no such
arrangement will, for purposes of any Transfer and Servicing Agreement,
modify any Receivable if such amendment or modification would extend the
final payment date of any Receivable beyond the Final Scheduled Maturity
Date. Some of such arrangements may result in the Servicer purchasing the
Receivable for the Purchase Amount. See "Risk Factors--Risk of Prepayment
and Possible Adverse Effect on Yield." The Servicer may sell the Financed
Vehicle securing the respective Receivable at public or private sale, or
take any other action permitted by applicable law. See "Certain Legal
Aspects of the Receivables."
Pursuant to the applicable Transfer and Servicing Agreement, Paragon,
as Servicer, has the right to delegate any or all of its responsibilities
and obligations as Servicer to any of its affiliates and to delegate
specific duties to third-party service providers who are in the business of
performing such duties. Notwithstanding any delegation of its
responsibilities and obligations to any other entity, the Servicer will
continue to be liable for all its servicing obligations under the
applicable Transfer and Servicing Agreement as if the Servicer alone were
servicing the Receivables.
<PAGE>
Collections
With respect to each Trust, the Servicer will generally deposit all
payments on the related Receivables received from Obligors and all proceeds
of the related Receivables collected during each collection period
specified in the related Prospectus Supplement (each, a "Collection
Period") into the related Collection Account not later than two business
days after receipt of available funds. However, if so provided in the
related Prospectus Supplement, so long as Paragon is the Servicer and
provided that (i) there exists no Servicer Termination Event and (ii) each
other condition to making monthly deposits as may be required by the
related Transfer and Servicing Agreement is satisfied, the Servicer may
retain such amounts until the Business Day (as defined in the related
Prospectus Supplement, a "Business Day") prior to the applicable Payment
Date. The Servicer or the Seller, as the case may be, will remit the
aggregate Purchase Amount of any Receivables to be purchased from a Trust
to the related Collection Account on the Business Day prior to the
applicable Payment Date. Pending deposit into the Collection Account,
collections may be employed by the Servicer at its own risk and for its own
benefit and will not be segregated from its own funds. To the extent set
forth in the related Prospectus Supplement, the Servicer may, in order to
satisfy the requirements described above, obtain a letter of credit or
other security for the benefit of the related Trust to secure timely
remittances of collections on the related Receivables and payment of the
aggregate Purchase Amount with respect to Receivables purchased by the
Servicer. If so provided in the related Prospectus Supplement, to the
extent the collections on a Precomputed Receivable for a Collection Period
are less than the scheduled payment, the amount of Payaheads made on such
Precomputed Receivable not previously applied (the "Payahead Balance"), if
any, with respect to such Precomputed Receivable shall be applied by the
Servicer to the extent of the shortfall.
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Servicing Compensation and Payment of Expenses
On each Payment Date, the Servicer will be entitled to receive the
Servicing Fee for the related Collection Period in an amount generally
equal to a specified percentage per annum (as set forth in the related
Prospectus Supplement, the "Servicing Fee Rate") of the Pool Balance as of
the first day of such Collection Period (the "Servicing Fee"). To the
extent provided in the related Prospectus Supplement, the Servicer's right
to receive all or a portion of the Servicing Fee on one or more Payment
Dates may be subordinated to the rights of Securityholders to receive
principal and interest for the related Collection Period. In addition, to
the extent provided in the related Prospectus Supplement, on one or more
Payment Dates all or a portion of such Servicing Fee may be deposited in
the Reserve Account until the Reserve Account Required Amount or such other
amount specified in the related Prospectus Supplement is on deposit in the
Reserve Account. If it is acceptable to the Rating Agency without a
reduction in the rating of any of the Securities, the Servicing Fee in
respect of a Collection Period (together with any portion of a Servicing
Fee that remains unpaid from prior Payment Dates) at the option of the
Servicer may be paid at or as soon as possible after the beginning of such
Collection Period out of the first collections of interest received on the
Receivables for such Collection Period.
The Servicer will also collect and retain all administrative fees,
expenses and charges paid by or on behalf of Obligors, including any late
fees, non-sufficient funds fees and liquidation fees collected on the
Receivables during such Collection Period and reimbursement of any personal
property taxes assessed on repossessed Financed Vehicles paid by the
Servicer ("Supplemental Servicing Fees") and will be entitled to
reimbursement from such Trust for certain liabilities. Payments by or on
behalf of Obligors will be allocated to scheduled payments and late fees
and other charges in accordance with the Servicer's customary practices and
procedures. In addition, the Servicer or the Seller will be entitled to
receive such fees and other amounts specified in the related Prospectus
Supplement. See "Description of the Transfer and Servicing
Agreements--Servicing Compensation and Payment of Expenses" and
"--Distributions" in the related Prospectus Supplement.
The Servicing Fee and Supplemental Servicing Fee will compensate the
Servicer for performing the functions of a third party servicer of motor
vehicle receivables as an agent for its beneficial owner, including
collecting and posting all payments, responding to inquiries of Obligors on
the Receivables, investigating delinquencies, sending billing information
to Obligors, paying costs of collections and disposition of defaults and
policing the collateral. The Servicing Fee also will compensate the
Servicer for administering the particular Receivables Pool, accounting for
collections and furnishing monthly and annual statements to the related
Trustee and Indenture Trustee with respect to distributions and generating
federal income tax information for such Trust and for the related
Noteholders and Certificateholders. The Servicing Fee also will reimburse
the Servicer for certain taxes, the fees of the related Trustee and
Indenture Trustee, if any, accounting fees, outside auditor fees, data
processing costs and other costs incurred in connection with administering
the applicable Receivables Pool.
Distributions
With respect to each series of Securities, beginning on the Payment
Date, as applicable, specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal
or interest only) on each class of such Securities entitled thereto will be
made by the applicable Trustee to the Noteholders and the
Certificateholders of such series. The timing, calculation, allocation,
order, source, priorities of and requirements for all payments to each
class of Noteholders and all distributions to each class of
Certificateholders of such series will be set forth in the related
Prospectus Supplement.
<PAGE>
With respect to each Trust, on each Payment Date, collections on the
related Receivables will be transferred from the Collection Account to the
Note Distribution Account for distribution to Noteholders, if any, and to
each Certificate Distribution Account for distribution to
Certificateholders to the extent provided in the related Prospectus
Supplement. Credit enhancement, such as a Reserve Account, will be
available to cover any shortfalls in the amount available for distribution
on such date to the extent (a) specified in the related Prospectus
Supplement and (b) that such credit enhancement is actually available for
such purpose from time to time. As more fully described in the related
Prospectus Supplement, distributions in respect of principal of a class of
Securities of a given series will be subordinate to distributions in
respect of interest on such class, and distributions in respect of one or
more classes of Certificates of such series may be subordinate to payments
in respect of Notes, if any, of such series or other classes of
Certificates of such series.
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Credit and Cash Flow Enhancement
The amounts and types of credit and cash flow enhancement
arrangements and the provider thereof, if applicable, with respect to each
class of Securities of a given series, if any, will be set forth in the
related Prospectus Supplement. If and to the extent provided in the related
Prospectus Supplement, credit and cash flow enhancement may be in the form
of subordination of one or more classes of Securities or all or a portion
of the Servicing Fee, Supplemental Servicing Fee or certain other amounts
payable to the Servicer or the Seller pursuant to the applicable Transfer
and Servicing Agreement, Reserve Accounts, over-collateralization, letters
of credit, credit or liquidity facilities, surety bonds, guaranteed
investment contracts, guaranteed rate agreements, swaps or other interest
rate protection agreements, repurchase obligations, yield supplement
agreements, other agreements with respect to third party payments or cash
deposits or any combination of two or more of the foregoing. If specified
in the related Prospectus Supplement, credit or cash flow enhancement for a
class of Securities may cover one or more other classes of Securities of
the same series, and credit or cash flow enhancement for a series of
Securities may cover one or more other series of Securities.
The presence of a Reserve Account and other forms of credit
enhancement for the benefit of any class or series of Securities is
intended to enhance the likelihood of receipt by the Securityholders of
such class or series of the full amount of principal and interest due
thereon and to decrease the likelihood that such Securityholders will
experience losses. The credit enhancement for a class or series of
Securities will not provide protection against all risks of loss and will
not guarantee repayment of the entire principal balance and interest
thereon except to the extent so specified in the related Prospectus
Supplement. If losses occur which exceed the amount covered by any credit
enhancement or which are not covered by any credit enhancement,
Securityholders of any class or series will bear their allocable share of
deficiencies, as described in the related Prospectus Supplement. In
addition, if a form of credit enhancement covers more than one series of
Securities, Securityholders of any such series will be subject to the risk
that such credit enhancement will be exhausted by the claims of
Securityholders of other series.
Reserve Account. If so provided in the related Prospectus Supplement,
pursuant to the related Transfer and Servicing Agreement, the Seller will
establish for a series or class of Securities an account, as specified in
the related Prospectus Supplement (the "Reserve Account"), which will be
maintained with the related Trustee or Indenture Trustee, as applicable.
The Reserve Account will be funded by an initial deposit on the Closing
Date in the amount (if any) set forth in the related Prospectus Supplement
and, if the related series has a Funding Period, will also be funded on
each Subsequent Transfer Date to the extent described in the related
Prospectus Supplement. To the extent described in the related Prospectus
Supplement, the amount (if any) on deposit in the Reserve Account will be
increased on each Payment Date thereafter up to the Reserve Account
Required Amount (as defined in the related Prospectus Supplement) by the
deposit therein of the amount of collections on the related Receivables
remaining on each such Payment Date after the payment of all other required
payments and distributions on such date. The related Prospectus Supplement
will describe the circumstances and manner under which distributions may be
made out of the Reserve Account, either to holders of the Securities
covered thereby or to the Seller.
The Seller may at any time, without consent of the Securityholders,
sell, transfer, convey or assign in any manner its rights to and interests
in distributions from the Reserve Account provided that (i) the Rating
Agency confirms in writing that such action will not result in a reduction
or withdrawal of the rating of any class of Securities, (ii) the Seller
provides to the applicable trustee and any Indenture Trustee an opinion of
counsel from independent counsel that such action will not cause the
related Trust to be classified as an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes and
(iii) such transferee or assignee agrees in writing to take positions for
federal income tax purposes consistent with the federal income tax
positions agreed to be taken by the Seller.
<PAGE>
Yield Supplement Account; Yield Supplement Agreement. If so provided
in the related Prospectus Supplement, pursuant to the related Transfer and
Servicing Agreement, Paragon, the Seller or another person will enter into
a Yield Supplement Agreement (as such term is defined in the related
Prospectus Supplement, the "Yield Supplement Agreement") pursuant to which
Paragon, the Seller or such other person will establish for a series a
Yield Supplement Account which will be maintained with the same entity at
which the related Collection Account is maintained and, if so specified in
the related Prospectus Supplement, will be created with an initial deposit
by the Seller. Each Yield Supplement Account will be designed solely to
hold funds to be applied by the
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Indenture Trustee or applicable Trustee to provide payments to
Securityholders in respect of Receivables the APR of which is less than the
Required Rate (as such term is defined in the related Prospectus
Supplement, the "Required Rate").
On each Payment Date, the obligor under the Yield Supplement
Agreement will pay to the Trust an amount equal to the Yield Supplement
Amount (as such term is defined in the related Prospectus Supplement, the
"Yield Supplement Amount") in respect of the Receivables for such Payment
Date. If so specified in the Prospectus Supplement, in the event that such
obligor defaults on its obligation to make payments under the Yield
Supplement Agreement, the related Prospectus Supplement will describe the
manner and circumstances in which amounts on deposit on any Payment Date in
the Yield Supplement Account in excess of the Required Yield Supplement
Amount (as such term is defined in the related Prospectus Supplement, the
"Required Yield Supplement Amount") will be released, and to whom such
amounts will be distributed. Monies on deposit in the Yield Supplement
Account may be invested in Permitted Investments under the circumstances
and in the manner described in the related Transfer and Servicing
Agreement. If so specified in the related Prospectus Supplement, investment
earnings on investment of funds in a Yield Supplement Account will be
deposited into such Yield Supplement Account. The related Prospectus
Supplement, will describe the manner in which any monies remaining on
deposit in a Yield Supplement Account upon the termination of the related
Trust pursuant to its terms will be released and to whom such amounts will
be distributed.
If a Yield Supplement Account is established with respect to any
Trust as to which a Pre-Funding Account has been established, the Seller
and the related Indenture Trustee or applicable Trustee, will enter into a
Yield Supplement Agreement pursuant to which, on each Subsequent Transfer
Date, the Seller will deposit into the Yield Supplement Account the
Additional Yield Supplement Amount (as such term is defined in the related
Prospectus Supplement, the "Additional Yield Supplement Amount") in respect
of the related Subsequent Receivables. Each Yield Supplement Agreement will
affect only Receivables having an APR less than the related Required Rate.
Statements to Trustees and Trust
Prior to each Payment Date with respect to each series of Securities,
the Servicer will provide to the applicable Indenture Trustee, if any, and
the applicable Trustee as of the close of business on the last day of the
preceding Collection Period a statement setting forth substantially the
same information as is required to be provided in the periodic reports
provided to Securityholders of such series described under "Certain
Information Regarding the Securities -- Reports to Securityholders."
Evidence as to Compliance
Each Transfer and Servicing Agreement will provide that the Servicer
will furnish to the related Trust and Indenture Trustee or Trustee, as
applicable, on or before April 30 of each year, beginning in the calendar
year following the establishment of the related Trust, a statement of a
firm of independent certified public accountants (or other evidence
satisfactory to the Rating Agency) as to compliance by the Servicer during
the preceding twelve months ended December 31 (or, in the case of the first
such certificate, from the applicable Closing Date) with certain standards
relating to the servicing of the applicable Receivables, the Servicer's
accounting records and computer files with respect thereto and certain
other matters.
<PAGE>
Each Transfer and Servicing Agreement will also provide for delivery
to the related Trust and Indenture Trustee or Trustee, as applicable,
substantially simultaneously with the delivery of such accountants'
statement referred to above, of a certificate signed by an officer of the
Servicer stating that the Servicer has fulfilled its obligations under the
applicable Transfer and Servicing Agreement, throughout the preceding
twelve months (or, in the case of the first such certificate, from the
Closing Date) or, if there has been a default in the fulfillment of any
such obligation, describing each such default. The Servicer has agreed to
give each Indenture Trustee and each Trustee notice of certain Servicer
Termination Events under the related Transfer and Servicing Agreement.
Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the applicable Trustee
at the appropriate address set forth in the Prospectus Supplement.
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Certain Matters Regarding the Servicer
Each Transfer and Servicing Agreement will provide that the Servicer
may not resign from its obligations and duties as Servicer thereunder,
except upon determination that the Servicer's performance of such duties is
no longer permissible under applicable law. No such resignation will become
effective until the related Indenture Trustee or Trustee, as applicable, or
a successor servicer, has assumed the Servicer's servicing obligations and
duties under such Transfer and Servicing Agreement.
Each Transfer and Servicing Agreement will further provide that
neither the Servicer nor any of its directors, officers, employees and
agents will be under any liability to the related Trust or the related
Noteholders or Certificateholders for taking any action or for refraining
from taking any action pursuant to such Transfer and Servicing Agreement or
for errors in judgment; except that neither the Servicer nor any such
person will be protected against any liability that would otherwise be
imposed by reason of willful misfeasance, bad faith or negligence in the
performance of the Servicer's duties thereunder or by reason of reckless
disregard of its obligations and duties thereunder. In addition, each
Transfer and Servicing Agreement will provide that the Servicer is under no
obligation to appear in, prosecute or defend any legal action that is not
incidental to the Servicer's servicing responsibilities under such Transfer
and Servicing Agreement and that, in its opinion, may cause it to incur any
expense or liability.
Under the circumstances specified in each Transfer and Servicing
Agreement, any entity into which the Servicer may be merged or
consolidated, or any entity resulting from any merger or consolidation to
which the Servicer is a party, or any entity succeeding to the business of
the Servicer or, with respect to its obligations as Servicer, any
corporation 50% or more of the voting stock of which is owned, directly or
indirectly, by Paragon, which corporation or other entity in each of the
foregoing cases assumes the obligations of the Servicer, will be the
successor of the Servicer under such Transfer and Servicing Agreement.
Servicer Termination Events
"Servicer Termination Events" under each Transfer and Servicing
Agreement will include: (i) the Servicer's failure to make deposits into
the Collection Account or to deliver to the applicable Trustee any proceeds
or payments payable to the Noteholders or Certificateholders required to be
so deposited or delivered in accordance with the Transfer and Servicing
Agreement, which failure continues unremedied for a period of two Business
Days (one Business Day with respect to payment of Purchase Amounts) after
receipt of notice by the Servicer from the applicable Trustee or discovery
of such failure by a responsible officer of the Servicer; (ii) the
Servicer's failure to deliver the required servicer's certificate to the
applicable Trustee by the Determination Date (as defined in the related
Prospectus Supplement, the "Determination Date") (or within two Business
Days thereafter, if such failure by the Servicer is due to circumstances
outside the Servicer's control), or failure on the part of the Servicer to
observe certain other of its covenants and agreements set forth in the
Transfer and Servicing Agreement with respect to mergers; (iii) the
Servicer's failure or failures to satisfy certain other covenants or
agreements set forth in the Transfer and Servicing Agreement, which failure
or failures, individually or in the aggregate, materially and adversely
affect the rights of Noteholders and remains uncured for a period of 30
days after notice thereof; (iv) certain events of insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings with
respect to the Servicer indicating its insolvency, reorganization pursuant
to bankruptcy proceedings, or inability to pay its obligations, the
commencement of an involuntary case under the federal bankruptcy law, as
now or hereinafter in effect, or another present or future federal or state
bankruptcy, insolvency or similar law and such case is not dismissed within
60 days; or (v) the breach of certain of the Servicer's representations or
warranties, which breach has a material adverse effect on the Trust or the
holders of Notes or Certificates and is not cured within 30 days after
notice thereof.
<PAGE>
Rights Upon Servicer Termination Events
In the case of any Trust that has issued Notes, as long as a Servicer
Termination Event under a Sale and Servicing Agreement remains unremedied,
the related Trustee or the related Indenture Trustee or holders of Notes of
the related series evidencing greater than 50% of the principal amount of
such Notes then outstanding may terminate all the rights and obligations of
the Servicer under such Sale and Servicing Agreement, whereupon the Backup
Servicer (if specified in the related Prospectus Supplement, the "Backup
Servicer") or a successor servicer appointed by such Indenture Trustee will
succeed to all the responsibilities, duties and liabilities of the
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Servicer under such Sale and Servicing Agreement and will be entitled to
similar compensation arrangements. In the case of any Trust that has not
issued Notes, as long as a Servicer Termination Event under the related
Pooling and Servicing Agreement remains unremedied, the related Trustee or
holders of Certificates of the related series evidencing greater than 50%
of the principal amount of such Certificates then outstanding may terminate
all the rights and obligations of the Servicer under such Pooling and
Servicing Agreement, whereupon such Trustee or a successor servicer
appointed by such Trustee will succeed to all the responsibilities, duties
and liabilities of the Servicer under such Pooling and Servicing Agreement
and will be entitled to similar compensation arrangements. If, however, a
conservator, receiver or similar official has been appointed for the
Servicer, and no Servicer Termination Event other than such appointment has
occurred, such official may have the power to prevent such Indenture
Trustee, such Noteholders, such Trustee or such Certificateholders from
effecting a transfer of servicing.
Waiver of Past Servicer Termination Events
With respect to each Trust that has issued Notes, the holders of
Notes evidencing at least a majority in principal amount of the then
outstanding Notes of the related series (or the holders of the Certificates
of such series evidencing not less than a majority of the outstanding
Certificate Balance, in the case of any Servicer Termination Event which
does not adversely affect the related Indenture Trustee or such
Noteholders) may, on behalf of all such Noteholders and Certificateholders,
waive any Servicer Termination Event by the Servicer in the performance of
its obligations under the related Sale and Servicing Agreement and its
consequences, except a Servicer Termination Event in making any required
deposits to or payments from any of the Trust Accounts in accordance with
such Sale and Servicing Agreement. With respect to each Trust that has not
issued Notes, holders of Certificates of such series evidencing not less
than a majority of the principal amount of such Certificates then
outstanding may, on behalf of all such Certificateholders, waive any
Servicer Termination Event by the Servicer in the performance of its
obligations under the related Transfer and Servicing Agreement, except a
Servicer Termination Event in making any required deposits to or payments
from the related Trust Accounts in accordance with such Transfer and
Servicing Agreement. No such waiver will impair such Noteholders' or
Certificateholders' rights with respect to subsequent defaults.
Amendment
Each of the Transfer and Servicing Agreements may be amended by the
parties thereto, without the consent of any of the Noteholders, to cure any
ambiguity, to correct or supplement any provision therein or for the
purpose of adding any provision to or changing in any manner or eliminating
any provision thereof or modifying in any manner the rights of the
Noteholders; provided, however, that such action must not, as evidenced by
an opinion of counsel, adversely affect in any material respect the
interests of the Noteholders. The parties thereto may also amend a Transfer
and Servicing Agreement with the consent of holders of notes of such series
evidencing at least a majority of the principal amount of then outstanding
Notes to add, change or eliminate any provisions of such Transfer and
Servicing Agreement or to modify the rights of the Noteholders; provided,
however, that the Rating Agency has notified the parties thereto in writing
prior to the execution thereof that such action will not result in a
reduction of the then current rating of any class of then outstanding
Notes; and provided, further, that such action will not: (i) increase or
reduce in any manner the amount of, or accelerate or delay the timing of,
collections of payments on Receivables or payments required to be made on
any Note, or the interest rate on any Note; (ii) amend any provisions
summarized under "The Notes--Priority of Distribution Amounts" in the
related Prospectus Supplement in such a manner as to affect the priority of
payment of interest or principal to Noteholders; or (iii) reduce the
percentage of the aggregate principal amount of the Notes required to
consent to any such amendment or any waiver thereunder, without the consent
of the holders of all Notes outstanding.
<PAGE>
Additionally, each of the Transfer and Servicing Agreements may be
amended by the parties thereto at the direction of the Seller or Servicer
without the consent of any of the Securityholders to add, modify or
eliminate such provisions as may be necessary or advisable in order to
enable all or a portion of a Trust to qualify as, and to permit an election
to be made to cause all or a portion of a Trust to be treated as, a
"financial asset securitization investment trust" as described in the
provisions of the "Small Business Job Protection Act of 1996," H.R. 3448,
and in connection with any such election, to modify or eliminate existing
provisions of a Transfer and Servicing Agreement relating to the intended
federal income tax treatment of the Securities and the related Trust in the
absence of the election. See "Federal Income Tax Consequences--FASIT
Legislation." It is a condition
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to any such amendment that the Rating Agency will have notified the Seller,
the Servicer and the applicable Trustee in writing that the amendment will
not result in a reduction or withdrawal of the rating of any outstanding
Securities with respect to which it is a Rating Agency.
Additionally, each of the Transfer and Servicing Agreements may be
amended by the parties thereto at the direction of the Seller or Servicer
without the consent of any of the Securityholders (i) to add, modify or
eliminate such provisions as may be necessary or advisable in order to
enable (a) the transfer to the Trust of all or any portion of the
Receivables to be derecognized under generally accepted accounting
principles ("GAAP") by the Seller to the applicable Trust, (b) the
applicable Trust to avoid becoming a member of the Seller's consolidated
group under GAAP, or (c) the Seller or any of its affiliates to otherwise
comply with or obtain more favorable treatment under any law or regulation
or any accounting rule or principle; and (ii) in connection with any such
addition, modification or elimination, without limiting the generality of
the foregoing clause (i), to cause the Receivables to be transferred by the
Seller first to a bankruptcy remote affiliate and from such affiliate to a
Trust; provided, however, that it is a condition to any such amendment that
(i) the Seller delivers an officer's certificate to the related Trustee to
the effect that such amendment meets the requirements set forth in this
paragraph and (ii) such amendment will not result in a withdrawal or
reduction of the rating of any outstanding series of Securities under the
related Trust.
Insolvency
Each Trust Agreement will provide that the applicable Trustee does
not have the power to commence a voluntary proceeding in bankruptcy with
respect to the related Trust without the unanimous prior approval of all
Certificateholders (including the Seller) of such Trust and the delivery to
such Trustee by each such Certificateholder (including the Seller) of a
certificate certifying that such Certificateholder reasonably believes that
such Trust is insolvent.
Non-Recourse Sale and Assignment
The Notes of any series will represent obligations solely of, and the
Certificates of any series will represent interests solely in, the related
Trust and neither the Notes nor the Certificates of any series will be
insured or guaranteed by Paragon, the Seller, the Servicer, any Trustee,
any Indenture Trustee or, except to the extent provided in the related
Prospectus Supplement, any other person or entity.
Payment of Notes
Upon the payment in full of all outstanding Notes of a given series
and the satisfaction and discharge of the related Indenture, the related
Trustee will succeed to all the rights of the Indenture Trustee, and the
Certificateholders of such series will succeed to all the rights of the
Noteholders of such series, under the related Sale and Servicing Agreement,
except as otherwise provided therein.
Termination
With respect to each Trust, the obligations of the Servicer, the
Seller, the related Trustee and the related Indenture Trustee, if any,
pursuant to the Transfer and Servicing Agreements will terminate upon the
earlier of (i) the maturity or other liquidation of the last related
Receivable and the disposition of any amounts received upon liquidation of
any such remaining Receivables, (ii) the payment to Noteholders, if any,
and Certificateholders of the related series of all amounts required to be
paid to them pursuant to the Transfer and Servicing Agreements and (iii)
the occurrence of either event described below.
<PAGE>
In order to avoid excessive administrative expense, the Servicer will
be permitted at its option to purchase from each Trust, as of any Payment
Date, if the then outstanding Pool Balance with respect to the Receivables
held by such Trust is equal to or less than the percentage of the Initial
Pool Balance set forth in the related Prospectus Supplement (as defined in
the related Prospectus Supplement, the "Initial Pool Balance"), all
remaining related Receivables and other Trust property at a price equal to
the aggregate of the Purchase Amounts thereof as of the end of the
preceding Collection Period, provided that such price is sufficient to
redeem each Security issued by such Trust at a redemption price equal to
its outstanding principal amount plus accrued and unpaid interest at the
applicable Interest Rate thereon.
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As more fully described in the related Prospectus Supplement, any
outstanding Notes of the related series will be redeemed concurrently with
either of the events specified above and the subsequent distribution to the
related Certificateholders of all amounts required to be distributed to
them pursuant to the applicable Trust Agreement or Pooling and Servicing
Agreement will effect early retirement of the Certificates of such series.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
Rights in the Receivables
The Receivables are "chattel paper" as defined in the UCC. Pursuant
to the UCC, a sale of chattel paper is treated in a manner similar to a
transaction creating a security interest in chattel paper. The Seller will
cause appropriate financing statements to be filed with the appropriate
governmental authorities to perfect the interest of the related Trust in
its purchase of Receivables from the Seller and in the appropriate
jurisdictions to perfect the interest of the Seller in its purchase of
Receivables from Paragon.
Pursuant to the applicable Transfer and Servicing Agreement, Paragon
will (unless otherwise specified in the related Prospectus Supplement) hold
the Receivables as custodian for the applicable Trustee following the sale
and assignment of the Receivables to the related Trust. The Seller will
take such action as is required to perfect the rights of the applicable
Trustee in the Receivables. The Receivables will not be segregated, stamped
or otherwise marked to indicate that they have been sold to the related
Trust. If through inadvertence or otherwise, another party purchases (or
takes a security interest in) the Receivables for new value in the ordinary
course of business and takes possession of the Receivables without
knowledge of the related Trust's security interest, the purchaser (or
secured party) will acquire an interest in the Receivables superior to the
interest of the related Trust. Any such purchaser/secured party would not
be deemed to have such knowledge merely because there are UCC filings of
record and would not learn of the sale of the Receivables from a review of
the Receivables since they would not be marked to show the sale of such
Receivables to the Trust.
Under the applicable Transfer and Servicing Agreement, the Servicer
will be obligated from time to time to take such actions as are necessary
to protect and perfect the related Trust's interest in the Receivables and
their proceeds.
Security Interest in Vehicles
Each motor vehicle retail installment sales contract or promissory
note and security agreement evidencing a Receivable grants a security
interest in the Financed Vehicle under the applicable UCC. Perfection of
security interests in automobiles, light duty trucks and sports utility
vehicles is generally governed by the motor vehicle registration laws of
the state in which the vehicle is located. In California and most other
states in which the Receivables are originated, a security interest in
automobiles and light duty trucks is perfected by notation (or compliance
with the requirements to effect such notation) of the secured party's lien
on the vehicles' certificate of title within the time permitted by
applicable law. Paragon takes all actions necessary under the laws of the
state in which the financed vehicle is located to perfect its security
interest in the financed vehicle securing a retail installment sales
contract purchased by it from a Dealer or Direct Loan made by Paragon,
including, where applicable, having a notation of its lien recorded on such
vehicle's certificate of title. Because the Servicer continues to service
the contracts and receivables, the Obligors on the contracts and
receivables will not be notified of the sales from Paragon to the Seller or
from the Seller to the Trust, and no action will be taken to record the
transfer of the security interest from Paragon to the Seller or from the
Seller to the Trust by amendment of the certificates of title for the
Financed Vehicles or otherwise.
<PAGE>
Pursuant to each Purchase Agreement, Paragon will assign to the
Seller its interests in the Financed Vehicles securing the Receivables
assigned by Paragon to the Seller and, with respect to each Trust, pursuant
to the related Transfer and Servicing Agreement, the Seller will assign its
interests in the Financed Vehicles securing the related Receivables to such
Trust. However, because of the administrative burden and expense, none of
Paragon, the Seller, the Servicer or the related Trustee will amend any
certificate of title to identify either the Seller or such Trust as the new
secured party on such certificate of title relating to a Financed Vehicle.
Also, Paragon will continue to hold any certificates of title relating to
the Financed Vehicles in its possession as custodian for the
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Seller and such Trust pursuant to the related Transfer and Servicing Agreement.
See "Description of the Transfer and Servicing Agreements--Sale and Assignment
of Receivables."
In California and most other states, an assignment such as that under
each Transfer and Servicing Agreement is an effective conveyance of a
security interest without amendment of any lien noted on a vehicle's
certificate of title, and the assignee succeeds thereby to the assignor's
rights as secured party. However, by not identifying the related Trust as
the secured party on the certificate of title, the security interest of
such Trust in the vehicle could be defeated through fraud or negligence
and, in most states including California, any person without notice of the
assignment is protected in dealing with the lienholder of record as the
holder of the security interest. In California and most other states, in
the absence of fraud or forgery by the vehicle owner or Paragon or
administrative error by state or local agencies, the notation of the lien
of the Paragon on the certificates of title will be sufficient to protect
the related Trust against the rights of subsequent purchasers of a Financed
Vehicle or subsequent lenders who take a security interest in a Financed
Vehicle. If there are any Financed Vehicles as to which the Seller failed
to obtain and assign to the related Trust a perfected security interest,
the security interest of such Trust would be subordinate to, among others,
subsequent purchasers of the Financed Vehicles and holders of perfected
security interests. Such a failure, however, would constitute a breach of
the warranties of the Seller under the related Transfer and Servicing
Agreement and would create an obligation of the Seller to repurchase the
related Receivable unless the breach is cured. Pursuant to each Transfer
and Servicing Agreement the Seller will assign such rights to the related
Trust. See "Description of the Transfer and Servicing Agreements--Sale and
Assignment of Receivables" and "Risk Factors--Risk of Unenforceable
Security Interest in Financed Vehicles."
Under the laws of California and most other states, the perfected
security interest in a vehicle would continue for four months after the
vehicle is moved to a state other than the state in which it is initially
registered and thereafter until the owner thereof re-registers the vehicle
in the new state but in any event not beyond the surrender of the
certificate of title. A majority of states, including California, generally
require surrender of a certificate of title to re-register a vehicle.
Accordingly, a secured party must surrender possession if it holds the
certificate of title to the vehicle or, in the case of a vehicle registered
in a state providing for the notation of a lien on the certificate of title
but not possession by the secured party, the secured party noted on the
certificate of title would receive notice of surrender if the security
interest is noted on the certificate of title. Thus, the secured party
noted on the certificate of title would have the opportunity to re-perfect
its security interest in the vehicle in the state of relocation. In states
that do not require a certificate of title for registration of a motor
vehicle, re- registration could defeat perfection. In the ordinary course
of servicing motor vehicle receivables, Paragon takes any necessary steps
to effect re-perfection upon receipt of notice of re-registration or
information from the Obligor as to relocation. Similarly, when an Obligor
sells a vehicle, Paragon generally must surrender possession of the
certificate of title or if noted as lienholder on the certificate of title
will receive notice as a result of its lien noted thereon and accordingly
will have an opportunity to require satisfaction of the related Receivable
before release of the lien. Under each Transfer and Servicing Agreement,
the Servicer is obligated to take appropriate steps, at the Servicer's
expense, to maintain perfection of security interests in the Financed
Vehicles and is obligated to purchase the related Receivable if it fails to
do so.
<PAGE>
Under the laws of California and most other states, liens for repairs
performed on, or storage of, a motor vehicle and liens for unpaid taxes
take priority over even a perfected security interest in a financed
vehicle. The Code also grants priority to certain federal tax liens over
the lien of a secured party. The laws of certain states, including
California, and federal law permit the confiscation of vehicles by
governmental authorities under certain circumstances if used in unlawful
activities, which may result in the loss of a secured party's perfected
security interest in the confiscated vehicle. Under each Transfer and
Servicing Agreement, the Seller will represent to the related Trust that,
as of the date the related Receivable is sold to such Trust, each security
interest in a Financed Vehicle is or will be prior to all other present
liens (other than tax liens and other liens that arise by operation of law)
upon and security interests in such Financed Vehicle. However, liens for
repairs, storage or taxes could arise, or the confiscation of a Financed
Vehicle could occur, at any time during the term of a Receivable. No notice
will be given to the Trustee, any Indenture Trustee, any Noteholders or the
Certificateholders in respect of a given Trust if such a lien arises or
confiscation occurs.
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Repossession
In the event of default by vehicle purchasers, the holder of the
motor vehicle retail installment sales contract or Direct Loan has all the
remedies of a secured party under the UCC, except where specifically
limited by other state laws or federal consumer protection laws. Among the
UCC remedies, the secured party has the right to perform self-help
repossession unless such act would constitute a breach of the peace.
Self-help is the method employed by the Servicer in most cases and is
accomplished simply by retaking possession of the financed vehicle. In the
event of default by the obligor, some jurisdictions require that the
obligor be notified of the default and be given a time period within which
he may cure the default prior to repossession. Generally, the right to cure
may be exercised on a limited number of occasions in any one-year period.
In cases where the obligor objects or raises a defense to repossession, or
if otherwise required by applicable state law, a court order must be
obtained from the appropriate state court, and the vehicle must then be
repossessed in accordance with that order.
Notice of Sale; Redemption Rights
The UCC and other state laws require the secured party to provide the
obligor with reasonable notice of the date, time and place of any public
sale and/or the date after which any private sale of the collateral may be
held. In most states, the obligor has the right to redeem the collateral
prior to actual sale by paying the secured party the unpaid principal
balance of the obligation plus reasonable expenses for repossession,
holding, and preparing the collateral for disposition, arranging for its
sale, and, in some jurisdictions, reasonable attorney's fees (the
"repossession costs"). In some states, including California, the obligor
also has right to reinstate the contract by paying the secured party
delinquent installments plus the repossession costs.
Deficiency Judgments and Excess Proceeds
The proceeds of resale of the vehicles generally will be applied
first to the expenses of resale and repossession and then to the
satisfaction of the indebtedness. While some states, including California,
impose prohibitions or limitations on deficiency judgments if the net
proceeds from resale do not cover the full amount of the indebtedness, a
deficiency judgment can be sought in those states that do not prohibit or
limit such judgments. However, the deficiency judgment would be a personal
judgment against the obligor for the shortfall, and a defaulting obligor
can be expected to have very little capital or sources of income available
following repossession. In addition, if any aspects of the repossession or
sale do not comply with applicable law, any otherwise existing right to a
deficiency judgement may be prohibited or limited. Therefore, in many
cases, it may not be useful to seek a deficiency judgment or, if one is
obtained, it may be settled at a significant discount.
Occasionally, after resale of a vehicle and payment of all expenses
and all indebtedness, there is a surplus of funds. In that case, the UCC
requires the creditor to remit the surplus to any holder of a lien with
respect to the vehicle or if no such lienholder exists or there are
remaining funds, to remit the surplus to the former owner of the vehicle.
<PAGE>
Soldiers' and Sailors Civil Relief Act
The Soldiers' and Sailors Civil Relief Act of 1940 (the "Relief Act")
imposes certain limitations upon the actions of creditors with respect to
persons serving in the Armed Forces of the United States, and, to a more
limited extent, their dependents and guarantors and sureties of debt
incurred by such persons. An obligation incurred by a person prior to
entering military service cannot bear interest at a rate in excess of 6%
during the person's term of military service, unless the obligee petitions
a court which determines that the person's military service does not impair
his or her ability to pay interest at a higher rate. Further, a secured
party may not repossess during a person's military service a motor vehicle
subject to an installment sales contract or a promissory note entered into
prior to the person's entering military service, for a loan default which
occurred prior to or during such service, without court action. The Relief
Act imposes penalties for knowingly repossessing property in contravention
of its provisions. Additionally, dependents of military personnel are
entitled to the protection of the Relief Act, upon application to a court,
if such court determines the obligation of such dependent has been
materially impaired by reason of military service. To the extent an
obligation is unenforceable against the person in military service or a
dependent, any guarantor or surety of such obligation will not be liable
for performance.
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Consumer Protection Laws
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers
involved in consumer finance. These laws include, but are not limited to,
the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal
Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Fair Debt Collection Procedures Act, the Magnuson-Moss
Warranty Act, the Federal Reserve Board's Regulations B, Z and AA, the
Relief Act, state adoptions of the National Consumer Act and of the Uniform
Consumer Credit Code and state motor vehicle retail installment sales acts,
retail installment sales acts and other similar laws. In addition to
Federal law, state consumer protection statutes regulate, among other
things, the terms and conditions of the motor vehicle retail installment
sales contracts and promissory notes and security agreements pursuant to
which purchasers finance the acquisition of motor vehicles. These laws
place finance charge ceilings and other restrictions on consumer
transactions and require contract disclosures in addition to those required
under federal law. These requirements impose specific statutory liabilities
upon creditors who fail to comply. In some cases, this liability could
affect the ability of an assignee, such as the applicable Trustee, to
enforce consumer finance contracts such as the Receivables. The "Credit
Practices" Rule of the Federal Trade Commission imposes additional
restrictions on contract provisions and credit practices.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade
Commission (the "FTC Rule"), the provisions of which are generally
duplicated by the Uniform Consumer Credit Code, other statutes or the
common law, has the effect of subjecting a seller in a consumer credit
transaction (and certain related creditors and their assignees) to all
claims and defenses which the obligor in the transaction could assert
against the seller of the goods. Liability under the FTC Rule is limited to
the amounts paid by the obligor under the contract and the holder of the
contract may also be unable to collect any balance remaining due thereunder
from the obligor.
Most of the Receivables will be subject to the requirements of the
FTC Rule. Accordingly, each Trust, as holder of the related Receivables,
will be subject to any claims or defenses that the purchaser of the
applicable Financed Vehicle may assert against the seller of the Financed
Vehicle. Such claims are limited to a maximum liability equal to the
amounts paid by the Obligor on the Receivable. If an Obligor were
successful in asserting any such claim or defense, such claim or defense
would constitute a breach of the Seller's warranties under the related
Transfer and Servicing Agreement and would create an obligation of the
Seller to repurchase the Receivable unless the breach is cured. See
"Description of the Transfer and Servicing Agreements--Sale and Assignment
of Receivables."
Under the motor vehicle dealer licensing laws of most states,
including California, sellers of motor vehicles are required to be licensed
to sell such vehicles at retail sale. In addition, with respect to used
motor vehicles , the FTC's Rule on Sale of Used Vehicles requires all
sellers of used motor vehicles to prepare, complete and display a "Buyer's
Guide" which explains the warranty coverage for such vehicles. Federal
Odometer Regulations promulgated under the Motor Vehicle Information and
Cost Savings Act require that all sellers of used motor vehicles furnish a
written statement signed by the seller certifying the accuracy of the
odometer reading. If a seller is not properly licensed or if either a
Buyer's Guide or odometer disclosure statement was not properly provided to
the purchaser of a Financed Vehicle, such purchaser may be able to assert a
claim against the seller of such vehicle. Although Paragon is not a seller
of motor vehicles and is not subject to these laws, a violation thereof may
form the basis for a claim or defense against Paragon, the Seller or the
applicable Trustee as holder of the Receivables.
Courts have applied general equitable principles to secured parties
pursuing repossession and litigation involving deficiency balances. These
equitable principles may have the effect of relieving an Obligor from some
or all of the legal consequences of a default.
<PAGE>
In several cases, consumers have asserted that the self-help remedies
of secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the
United States. Courts have generally upheld the notice provisions of the
UCC and related laws as reasonable or have found that the repossession and
resale by the creditor do not involve sufficient state action to afford
constitutional protection to borrowers.
42
<PAGE>
Under each Transfer and Servicing Agreement, the Seller will warrant
to the related Trust that each Receivable complies with all requirements of
law in all material respects. Accordingly, if an Obligor has a claim
against a Trust for violation of any law and such claim materially and
adversely affects such Trust's interest in a Receivable, such violation
would constitute a breach of the warranties of the Seller under such
Transfer and Servicing Agreement and would create an obligation of the
Seller to repurchase the Receivable unless the breach is cured. See
"Description of the Transfer and Servicing Agreements -- Sale and
Assignment of Receivables."
Certain Matters Relating to Insolvency
Seller has taken steps in structuring the transactions described
herein and in the related Prospectus Supplement that are intended to ensure
that the voluntary or involuntary application for relief by Paragon under
the Bankruptcy Code or Insolvency Laws will not result in consolidation of
the assets and liabilities of the Seller with those of Paragon. These steps
include the creation of the Seller as a separate, limited-purpose
subsidiary pursuant to a certificate of incorporation containing certain
limitations (including restrictions on the nature of the Seller's business
and a restriction on the Seller's ability to commence a voluntary case or
proceeding under any Insolvency Law without the prior unanimous affirmative
vote of all of its directors). However, there can be no assurance that the
activities of the Seller would not result in a court's concluding that the
assets and liabilities of the Seller should be consolidated with those of
Paragon in a proceeding under any Insolvency Law. If a court were to
conclude that the assets and liabilities of the Seller should be
consolidated with those of Paragon in a proceeding under any Insolvency
Law, then any "true sale" to the Seller would be ineffective to remove the
Receivables and other assets from the bankruptcy estate of Paragon.
Although there can be no assurance, the Seller believes there is no
material risk that the Trust would be substantively consolidated with any
other entity if that entity were to become the subject of a proceeding
under any Insolvency Law.
The Seller and Paragon each intend that the transfer of Receivables
by Paragon to the Seller will constitute a "true sale" of such Receivables.
The Seller will take steps in structuring its purchases of Receivables from
Paragon to increase the likelihood that such purchases will each be deemed
a "true sale". In particular, each such purchase will be without recourse
to Paragon for credit losses and at a purchase price believed by the
parties to represent the fair market value of the applicable Receivables.
If the transfer does, in fact, constitute such a "true sale," the
Receivables and the proceeds thereof would not be part Paragon's bankruptcy
estate under Section 541 of the Bankruptcy Code should Paragon become the
subject of a bankruptcy case subsequent to the transfer of the Receivables
to the Seller. It is a condition of the offering that the Seller shall have
received an opinion of counsel to the effect that, subject to certain
facts, assumptions and qualifications, the transfer of such Receivables by
Paragon to the Seller pursuant to the related Purchase Agreement would be
characterized as a "true sale'" of such Receivables to the Seller and such
Receivables would not form part of Paragon's bankruptcy estate pursuant to
Section 541 of the Bankruptcy Code.
Notwithstanding the foregoing, if the Seller or Paragon were to
become a debtor in a bankruptcy case and a creditor or trustee in
bankruptcy of the Seller or Paragon or Paragon itself were to take the
position that the transfer of Receivables by the Seller to the Trust, or by
Paragon to the Seller, as the case may be, should instead be treated as a
pledge of the Receivables to secure a borrowing of the Seller or Paragon,
as the case may be, then delays in payments of collections of the
Receivables could occur or (should the court rule in favor of any such
trustee, debtor or creditor) reductions in the amount of such payments
could result. If the transfer of the Receivables by the Seller to the
Trust, or by Paragon to the Seller, is treated as a pledge instead of a
sale, a tax, government or other lien on the property of the Seller or
Paragon, as the case may be, arising before the transfer of the Receivables
to the Trust may have priority over the Trust's or the Seller's interest in
the Receivables.
<PAGE>
In Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d 948 (10th Cir.
1993), cert. denied 114 S.Ct 554 (1993), the United States Court of Appeals
for the 10th Circuit suggested that even where a transfer of accounts from
a seller to a buyer constitutes a "true sale," the accounts would
nevertheless constitute property of the seller's bankruptcy estate in a
bankruptcy of the seller. If the Seller were to become subject to a
bankruptcy proceeding and a court were to follow the Octagon court's
reasoning, Securityholders might experience delays in payment or possibly
losses on their investment in the Securities. The Permanent Editorial Board
of the UCC has issued an official commentary (PEB Commentary No. 14) which
characterizes the Octagon court's interpretation of Article 9 of the UCC as
erroneous. Such commentary states that nothing in Article 9 is intended to
prevent the transfer of ownership of accounts or chattel paper. However,
such commentary is not legally binding on any court.
43
<PAGE>
Other Limitations
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a secured
party to realize upon collateral or to enforce a deficiency judgment. For
example, in a Chapter 13 proceeding under the federal bankruptcy law, a
court may prevent a creditor from repossessing a vehicle, and, as part of
the rehabilitation plan, reduce the amount of the secured indebtedness to
the market value of the vehicle at the time of bankruptcy (as determined by
the court), leaving the creditor as a general unsecured creditor for the
remainder of the indebtedness. A bankruptcy court may also reduce the
monthly payments due under a contract or change the rate of interest and
time of repayment of the indebtedness.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Set forth in the related Prospectus Supplement is a summary of
material federal income tax consequences of the purchase, ownership and
disposition of the Notes and the Certificates. The summary is intended as a
discussion of the possible effects of certain federal income tax
consequences to holders generally, but does not purport to furnish
information in the level of detail or with the attention to a holder's
specific tax circumstances that would be provided by a holder's own tax
advisor. For example, it does not discuss the tax consequences of the
purchase, ownership and disposition of the Notes and Certificates by
Noteholders or Certificateholders that are subject to special treatment
under the federal income tax laws (including banks and thrifts, insurance
companies, regulated investment companies, dealers in securities, foreign
investors, trusts and estates and pass-through entities, the equity holders
of which are any of the foregoing). In addition, any discussion regarding
the Notes is limited to the federal income tax consequences of the initial
Noteholders and not a purchaser in the secondary market. Moreover, there
are no cases or Internal Revenue Service ("IRS") rulings on similar
transactions involving both debt and equity interests issued by a trust
with terms similar to those of the Notes and the Certificates. As a result,
the IRS may disagree with all or a part of the discussion in the Prospectus
Supplement. We suggest that prospective investors consult their own tax
advisors in determining the federal, state, local, foreign and any other
tax consequences to them of the purchase, ownership and disposition of the
Notes and the Certificates.
The summary is based upon current provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the Treasury regulations promulgated
thereunder and judicial or ruling authority, all of which are subject to
change, which change may be retroactive. Each Trust will be provided with
an opinion of Federal Tax Counsel, regarding certain federal income tax
matters. An opinion of Federal Tax Counsel, however, is not binding on the
IRS or the courts. No ruling on any of the issues discussed in the related
Prospectus Supplement will be sought from the IRS. For purposes of the
summary, references to the Trust, the Notes, the Certificates and related
terms, parties and documents shall be deemed to refer, unless otherwise
specified therein, to each Trust and the Notes, Certificates and related
terms, parties and documents applicable to such Trust.
The summary of material federal tax consequences to the
Certificateholders, and, if applicable, to the Noteholders, is set forth in
the related Prospectus Supplement. The federal income tax consequences to
Certificateholders will vary depending on whether the Trust is intended to
be treated as a partnership under the Code or as a grantor trust. The
Prospectus Supplement for each series of Certificates will specify whether
a partnership election will be made or the Trust will be treated as a
grantor trust. In addition, to the extent set forth in the related
Prospectus Supplement, the tax consequences to Securityholders may vary
depending upon whether the related Prospectus Supplement provides for a
Revolving Period for Trusts that issue Notes.
<PAGE>
Tax Opinions
The following is a brief summary of the tax opinions being rendered
by Mayer, Brown & Platt, special federal tax counsel for the Seller
("Federal Tax Counsel"). Unless the Prospectus Supplement specifies that
the Trust will be treated as a grantor trust, Federal Tax Counsel is of the
opinion that the applicable Trust will not be classified as an association
(or publicly traded partnership) taxable as a corporation for federal
income tax purposes. Further, with respect to the Notes, Federal Tax
Counsel is of the opinion that the Notes will be characterized as debt for
federal income tax purposes. If the Prospectus Supplement specifies that
the related
44
<PAGE>
Trust will be treated as a grantor trust, Federal Tax Counsel is of the
opinion that such Trust will not be classified as an association (or
publicly traded partnership) taxable as a corporation and that such Trust
will be classified as a grantor trust under Subpart E, Part I of Subchapter
J of the Code for federal income tax purposes.
In addition, Federal Tax Counsel will render its opinion that it has
prepared or reviewed the statements herein and in the related Prospectus
Supplement under the heading "Summary of Terms--Material Federal Income Tax
Consequences" as they relate to federal income tax matters and under the
heading "Material Federal Income Tax Consequences," and is of the opinion
that such statements are a fair and accurate discussion of all material
federal income tax consequences of the purchase, ownership and disposition
of the Securities. Any such opinions will be filed either as an exhibit to
the registration statement of which this Prospectus forms a part or will be
filed as an exhibit to a Form 8-K filed prior to the confirmation of sales
of any series of Securities. Such statements are intended as a discussion
of the possible effects of the classification of the Trust as a partnership
or a grantor trust, as the case may be, for federal income tax purposes on
investors and of related tax matters affecting investors generally, but do
not purport to furnish information in the level of detail or with the
attention to the investor's specific tax circumstances that would be
provided by an investor's own tax adviser. Accordingly, we suggest that
investors consult their own tax advisers with regard to the tax
consequences to it of investing in the Notes and/or Certificates.
FASIT Legislation
In August, 1996, the United States Congress passed and President
Clinton signed into law the "Small Business Job Protection Act of 1996,"
H.R. 3448 (the "Act"). The Act, which was effective September 1, 1997,
created a new type of entity for federal income tax purposes called a
"financial asset securitization investment trust" or "FASIT." The Act
enables certain arrangements similar to a Trust to elect to be treated as a
FASIT. Under the FASIT provisions of the Act, a FASIT generally would avoid
federal income taxation and could issue securities substantially similar to
the Certificates and Notes, and those securities would be treated as debt
for federal income tax purposes. If so specified in the related Prospectus
Supplement, a Trust may make an election to be treated as a FASIT. The
applicable Transfer and Servicing Agreement for such a Trust may contain
any such terms and provide for the issuance of Notes or Certificates on
such terms and conditions as are permitted to a FASIT and described in the
related Prospectus Supplement. However, any Trust electing to be treated as
a FASIT will be limited by the applicable Transfer and Servicing Agreement
in its ability to add or remove assets to substantially the same extent as
a "real estate mortgage investment conduit" under the Code and the
regulations thereunder. In addition, upon satisfying certain conditions set
forth in the applicable Transfer and Servicing Agreement for such a Trust,
the Seller and Servicer will be permitted to amend the Transfer and
Servicing Agreements in order to enable all or a portion of a Trust to
qualify as a FASIT and to permit a FASIT election to be made with respect
thereto, and to make such modifications to a Transfer and Servicing
Agreement as may be permitted by reason of the making of such an election.
See "Description of the Transfer and Servicing Agreements--Amendment."
However, there can be no assurance that the Seller will or will not cause
any permissible FASIT election to be made with respect to a Trust or amend
a Transfer and Servicing Agreement in connection with any election. In
addition, if such an election is made, it may cause a holder to recognize
gain (but not loss) with respect to any Notes or Certificates held by it,
even though Federal Tax Counsel will deliver its opinion that a Note will
be treated as debt for federal income tax purposes without regard to the
election and the Note or Certificate would be treated as debt following the
election. Additionally, any such election and any related amendments to a
Transfer and Servicing Agreement may have other tax and non-tax
consequences to Securityholders. Accordingly, we suggest that
Securityholders consult their tax advisors with regard to the effects of
any such election and any permitted related amendments on them in their
particular circumstances.
<PAGE>
STATE TAX CONSEQUENCES
The above discussion does not address the tax treatment of any tax
partnership, grantor trust, Notes, Certificates, Noteholders or
Certificateholders under any state tax laws. We suggest that prospective
investors consult with their own tax advisors regarding the state tax
treatment of any tax partnership or grantor trust as well as any state tax
consequences to them of purchasing, holding and disposing of Notes or
Certificates.
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<PAGE>
* * *
THE FEDERAL AND STATE TAX DISCUSSIONS SET FORTH ABOVE AND IN THE
RELATED PROSPECTUS SUPPLEMENT MAY NOT BE APPLICABLE DEPENDING UPON A
NOTEHOLDER'S OR CERTIFICATEHOLDER'S PARTICULAR TAX SITUATION. WE SUGGEST
THAT PROSPECTIVE PURCHASERS CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
NOTES AND CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL,
STATE OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit-sharing or other employee benefit plan subject to ERISA, as well as
individual retirement accounts, certain types of Keogh Plans and other
plans subject to Section 4975 of the Code (each a "Benefit Plan"), from
engaging in certain transactions with persons that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect
to such Benefit Plan. A violation of these "prohibited transaction" rules
may result in an excise tax or other penalties and liabilities under ERISA
and the Code for such persons.
A fiduciary of a Benefit Plan considering the purchase of Securities
of any series should carefully review with its legal and other advisors
whether the assets of the related Trust would be considered plan assets,
whether the purchase or holding of the Securities could give rise to a
transaction prohibited or otherwise impermissible under ERISA or the Code,
and should refer to the discussion under "ERISA Considerations" in the
related Prospectus Supplement regarding any restrictions on the purchase or
holding of the Securities offered thereby.
Certain employee benefit plans, such as governmental plans (as
defined in Section 3(32) of ERISA) and certain church plans (as defined in
Section 3(33) of ERISA) are not subject to the fiduciary and prohibited
transaction provisions under ERISA or the Code discussed herein, but
governmental plans may be subject to comparable restrictions under
applicable state law.
Trusts That Issue Notes
The following discussion applies only to Trusts that issue Notes.
Certain transactions involving a Trust might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit
Plan that purchased Notes or Certificates if assets of the Trust were
deemed to be assets of the Benefit Plan. Under a regulation issued by the
United States Department of Labor (the "Plan Asset Regulation"), the assets
of a Trust would be treated as plan assets of a Benefit Plan for the
purposes of ERISA and the Code only if the Benefit Plan acquired an "equity
interest" in the Trust and none of the exceptions contained in the Plan
Asset Regulation was applicable. An equity interest is defined under the
Plan Asset Regulation as an interest other than an instrument which is
treated as indebtedness under applicable local law and which has no
substantial equity features. The likely treatment of the Notes as debt
under ERISA will be described in the related Prospectus Supplement.
<PAGE>
Regardless of whether the Notes are treated as an equity interest for
purposes of the Plan Asset Regulation, the acquisition or holding of such
Notes with plan assets of a Benefit Plan could be considered to give rise
to a prohibited transaction if the Seller, the Servicer or the applicable
Issuer, Trustee or Indenture Trustee is or becomes a party in interest
under ERISA or a disqualified person under the Code with respect to such
Benefit Plan. In such case, certain exemptions from the prohibited
transactions rules may be available, depending upon the type and
circumstances of the Benefit Plan fiduciary making the decision to purchase
the Notes with assets of the Benefit Plan. Included among these exemptions
are Prohibited Transaction Exemption ("PTE") 84-14, applicable to certain
transactions effected by a qualified professional asset manager; PTE 90-1,
applicable to certain transactions entered into by an insurance company
separate account; PTE 91-38, applicable to certain transactions entered
into by a bank collective investment trust; PTE 95-60, applicable to
certain transactions entered into by an insurance company general account;
and PTE 96-23, applicable to certain transactions entered into by an
in-house asset manager. Purchasers acquiring Notes of any series with the
assets of a Benefit Plan
46
<PAGE>
shall be deemed to represent and warrant that such purchase and holding
will not give rise to a nonexempt prohibited transaction.
Because the Certificates issued by a Trust that also issues Notes
will most likely be treated as equity interests under the Plan Asset
Regulation, such Certificates may not be acquired with the assets of any
Benefit Plan. Purchasers of the Certificates issued by a Trust that also
issues Notes shall be deemed to represent and warrant that they are not
purchasing the Certificates with the assets of a Benefit Plan.
Trusts That Do Not Issue Notes
The following discussion applies only to nonsubordinated Certificates
(referred to herein as "Senior Certificates") issued by a Trust that does
not issue Notes.
The related Prospectus Supplement will indicate whether the lead
underwriter named therein has been granted by the U.S. Department of Labor,
an exemption (the "Exemption") from certain of the prohibited transaction
rules of ERISA with respect to the initial purchase, the holding and the
subsequent resale by Benefit Plans of certificates representing interests
in asset-backed pass-through trusts that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of
the Exemption. The receivables covered by the Exemption include motor
vehicle installment sales contracts such as the Receivables.
Among the conditions which must be satisfied for the Exemption to
apply to the Senior Certificates are the following:
(1) the acquisition of the Senior Certificates by a Benefit
Plan is on terms (including the price for the Senior Certificates)
that are at least as favorable to the Benefit Plan as they would be
in an arm's length transaction with an unrelated party;
(2) the rights and interests evidenced by the Senior
Certificates acquired by the Benefit Plan are not subordinated to the
rights and interests evidenced by other certificates of the Trust;
(3) the Senior Certificates acquired by the Benefit Plan have
received a rating at the time of such acquisition that is in one of
the three highest generic rating categories from either Standard &
Poor's Ratings Services, Moody's Investors Service, Inc., Duff &
Phelps Credit Rating Co. or Fitch Investors Service, L.P.;
(4) the Trustee is not an affiliate of any other member of
the Restricted Group (as defined below);
(5) the sum of all payments made to the underwriters in
connection with the distribution of the Senior Certificates
represents not more than reasonable compensation for underwriting the
Senior Certificates; the sum of all payments made to and retained by
the Seller pursuant to the sale of the Receivables to the Trust
represents not more than the fair market value of such Receivables;
and the sum of all payments made to and retained by the Servicer
represents not more than reasonable compensation for the Servicer's
services under the Sale and Servicing Agreement and reimbursement of
the Servicer's reasonable expenses in connection therewith; and
(6) the Benefit Plan investing in the Senior Certificates is
an "accredited investor" as defined in Rule 501(a)(1) of Regulation D
of the Commission under the Securities Act.
<PAGE>
Additional conditions must be satisfied for a Trust with a
Pre-Funding Account to be covered by the Exemption.
Moreover, the Exemption would provide relief from certain
self-dealing/conflict of interest or prohibited transactions only if, among
other requirements, (i) in the case of the acquisition of Senior
Certificates in connection with the initial issuance, at least fifty (50)
percent of the Senior Certificates are acquired by persons independent of
the Restricted Group, (ii) the Benefit Plan's investment in Senior
Certificates does not exceed twenty-five (25) percent of all of the Senior
Certificates outstanding at the time of the acquisition, and (iii)
immediately after the acquisition, no more than twenty-five (25) percent of
the assets of the Benefit Plan are invested in certificates representing an
interest in one or more trusts containing assets sold or serviced by the
same entity. The Exemption does not apply to Benefit Plans sponsored by the
Seller, any underwriter, the
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<PAGE>
Trustee, the Servicer, any Obligor with respect to Receivables included in
the Trust constituting more than five percent of the aggregate unamortized
principal balance of the assets in the Trust, or any affiliate of such
parties (the "Restricted Group").
The related Prospectus Supplement will indicate whether the Seller
believes that all conditions of the Exemption other than those within the
control of the investors have been met with respect to the Senior
Certificates, and whether the Senior Certificates may be acquired by
Benefit Plans.
Because any Certificates issued by a Trust that are subordinate to
any other class of Securities (the "Subordinate Certificates") will not be
eligible for the relief afforded by the Exemption, such Subordinate
Certificates may not be acquired with the assets of a Benefit Plan. Each
purchaser of a Subordinate Certificate shall be deemed to represent and
warrant that it is not acquiring or holding the Subordinate Certificate
with the assets of a Benefit Plan.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement
with respect to the Notes, if any, of a given series and an underwriting
agreement with respect to the Certificates of such series (collectively,
the "Underwriting Agreements"), the Seller will agree to cause the related
Trust to sell to the underwriters named therein and in the related
Prospectus Supplement, and each of such underwriters will severally agree
to purchase, the principal amount of each class of Notes and Certificates,
as the case may be, of the related series set forth therein and in the
related Prospectus Supplement.
In each of the Underwriting Agreements with respect to any given
series of Securities, the several underwriters will agree, subject to the
terms and conditions set forth therein, to purchase all the Notes and
Certificates, as the case may be, described therein which are offered
hereby and by the related Prospectus Supplement if any of such Notes and
Certificates, as the case may be, are purchased.
In the initial distribution of the Securities, the Securities will
either be offered at prices set forth in the applicable Prospectus
Supplement or, if specified in the applicable Prospectus Supplement,
offered at varying prices in negotiated transactions. After the initial
public offering of such Securities, those public offering prices may
change.
Each Underwriting Agreement will provide that the Seller will
indemnify the underwriters against certain civil liabilities, including
liabilities under the Securities Act, or contribute to payments the several
underwriters may be required to make in respect thereof.
Each Trust may, from time to time, invest the funds in its Trust
Accounts in Permitted Investments acquired from such underwriters or from
the Seller.
Pursuant to each Underwriting Agreement with respect to a given
series of Securities, the closing of the sale of any class of Securities
subject to such Underwriting Agreement will be conditioned on the closing
of the sale of all other such classes of Securities of that series.
The place and time of delivery for the Securities in respect of which
this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
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<PAGE>
LEGAL OPINIONS
Certain legal matters relating to the Securities of any series will
be passed upon for the related Trust, the Seller and the Servicer by Nancy
C. Ferguson, Esq., General Counsel of the Servicer, and by Mayer, Brown &
Platt, Chicago, Illinois. Certain legal matters will be passed upon for the
Underwriters by its counsel set forth in the related Prospectus Supplement.
Mayer, Brown & Platt may from time to time render legal services to the
Seller, the Servicer and their affiliates.
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INDEX OF TERMS
ACAPS.......................................................................13
Actuarial Receivables.......................................................12
Additional Yield Supplement Amount..........................................35
APR.........................................................................11
Backup Servicer.............................................................37
Bankruptcy Code..............................................................5
Base Rate...................................................................22
Benefit Plan................................................................46
Bill........................................................................45
Business Day................................................................33
Buyer's Guide...........................................................42, 48
Calculation Agent...........................................................23
Cede.........................................................................8
Cedel.......................................................................25
Cedel Participants..........................................................25
Certificate Balance..........................................................2
Certificate Distribution Account............................................31
Certificate Owner...........................................................21
Certificate Pool Factor.....................................................15
Certificate Rate.............................................................3
Certificateholders...........................................................7
Certificates.................................................................1
Closing Date................................................................29
Code........................................................................44
Collection Account..........................................................30
Collection Period...........................................................32
Commission...................................................................2
Cooperative.................................................................25
CSC.........................................................................14
Cutoff Date.................................................................10
Dealer Agreement.............................................................3
Dealer Assignment............................................................3
Dealer Recourse.............................................................10
Dealers......................................................................3
Definitive Certificates.....................................................26
Definitive Notes............................................................26
Definitive Securities.......................................................26
Depositaries................................................................23
Depository..................................................................16
Determination Date..........................................................36
Direct Loans................................................................11
Distribution Date...........................................................22
DTC.....................................................................8, A-1
DTC Participants............................................................23
DTC's Nominee ...............................................................8
Eligible Account............................................................32
Eligible Investments........................................................31
Euroclear...................................................................25
Euroclear Operator..........................................................25
Euroclear Participants......................................................25
Events of Default...........................................................19
Exchange Act.................................................................2
Exemption...................................................................47
FASIT.......................................................................11
Final Scheduled Maturity Date................................................8
50
<PAGE>
Financed Vehicles............................................................1
Fixed Rate Securities.......................................................22
Floating Rate Securities....................................................22
FTC Rule....................................................................42
Funding Period...............................................................7
GAAP........................................................................38
Global Securities..........................................................A-1
Indenture................................................................1, 17
Indenture Trustee............................................................1
Indirect Participants.......................................................23
Initial Pool Balance........................................................39
Initial Receivables..........................................................8
Insolvency Laws..........................................................5, 43
Interest Rate ...............................................................3
Interest Reset Period.......................................................22
Investment Earnings.........................................................32
IRS.........................................................................44
Issuer......................................................................21
LIBOR.......................................................................23
Note Distribution Account...................................................31
Note Pool Factor............................................................15
Noteholders..................................................................7
Note.........................................................................1
Obligor.....................................................................10
PAC.........................................................................18
Paragon......................................................................1
Participants................................................................17
Payahead Account............................................................31
Payahead Balance............................................................33
Payaheads...................................................................31
Payment Date................................................................17
Permitted Investments.......................................................31
Plan Assets Regulation......................................................46
Pool Balance................................................................15
Pooling and Servicing Agreement.............................................29
Pre-Funded Amount...........................................................15
Pre-Funding Account.........................................................15
Precomputed Receivables.....................................................12
Prepayments..................................................................3
Prospectus Supplement........................................................1
Purchase Agreement..........................................................10
Purchase Amount.............................................................30
Rating Agency.............................................................7, 8
Receivables..................................................................1
Receivables Pool............................................................10
Registration Statement.......................................................2
Related Documents...........................................................20
Relief Act..................................................................42
Required Rate...............................................................35
Required Yield Supplement Amount............................................35
Reserve Account.............................................................34
Restricted Group............................................................48
Revolving Account...........................................................15
Revolving Period.............................................................7
Rule of 78's Receivables....................................................12
Sale and Servicing Agreement................................................29
Schedule of Receivables.....................................................29
51
<PAGE>
Securities...................................................................1
Securities Act...............................................................2
Security Owners..............................................................8
Securityholders..............................................................7
Seller.......................................................................1
Senior Certificates.........................................................47
Series.....................................................................A-1
Servicer.....................................................................1
Servicer Termination Events.................................................36
Servicing Fee...............................................................33
Servicing Fee Rate..........................................................33
Simple Interest Receivable..................................................12
Spread......................................................................22
Spread Multiplier...........................................................23
Strip Certificates..........................................................22
Strip Notes.................................................................17
Strip Securities............................................................22
Subsequent Receivables.......................................................7
Subsequent Transfer Date....................................................29
Supplemental Servicing Fees.................................................33
TAC.........................................................................18
Terms and Conditions........................................................26
Transfer and Servicing Agreement............................................29
Trust........................................................................1
Trust Accounts..............................................................31
Trust Agreement..............................................................1
Trustee......................................................................1
U.S. Person................................................................A-3
UCC.........................................................................30
Underwriters.................................................................3
Underwriting Agreements.....................................................48
Warehouse Financing.........................................................30
Withholding Tax Regulations................................................A-3
Yield Supplement Account....................................................31
Yield Supplement Agreement..................................................35
Yield Supplement Amount.....................................................35
52
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Paragon
Auto Receivables Trust Asset Backed Notes and Asset Backed Certificates
(the "Global Securities") will be available only in book-entry form.
Investors in the Global Securities may hold such Global Securities through
any of The Depository Trust Company ("DTC"), Cedel or Euroclear. The Global
Securities will be tradeable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary
trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures
applicable to U.S. corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Securities will be effected on a
delivery-against-payment basis through the respective Depositaries of Cedel
and Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on
their behalf as direct and indirect Participants in DTC. As a result, Cedel
and Euroclear will hold positions on behalf of their participants through
their respective Depositaries, which in turn will hold such positions in
accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to U.S. corporate debt
obligations. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global
security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and
seller's accounts are located to ensure that settlement can be made on the
desired value date.
Trading between DTC Participants. Secondary market trading between
DTC Participants will be settled using the procedures applicable to U.S.
corporate debt obligations in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in
same-day funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC
Participant to the account of a Cedel Participant or a Euroclear
Participant,
A-1
<PAGE>
the purchaser will send instructions to Cedel or Euroclear through a Cedel
Participant or Euroclear Participant at least one business day prior to
settlement. Cedel or Euroclear will instruct the respective Depositary, as
the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including
the last coupon payment date to and excluding the settlement date. Payment
will then be made by the respective Depositary to the DTC Participant's
account against delivery of the Global Securities. After settlement has
been completed, the Global Securities will be credited to the respective
clearing system and by the clearing system, in accordance with its usual
procedures, to the Cedel Participant's or Euroclear Participant's account.
The Global Securities credit will appear the next day (European time) and
the cash debit will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding
day when settlement occurred in New York). If settlement is not completed
on the intended value date (i.e., the trade fails), the Cedel or Euroclear
cash debit will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement, either from cash on hand or existing
lines of credit, as they would for any settlement occurring within Cedel or
Euroclear. Under this approach, they may take on credit exposure to Cedel
or Euroclear until the Global Securities are credited to their accounts one
day later.
As an alternative, if Cedel or Euroclear has extended a line of
credit to them, Cedel Participants or Euroclear Participants can elect not
to pre-position funds and allow that credit line to be drawn upon the
finance settlement. Under this procedure, Cedel Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for
one day, assuming they cleared the overdraft when the Global Securities
were credited to their accounts. However, interest on the Global Securities
would accrue from the value date. Therefore, in many cases the investment
income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges,
although this result will depend on each Cedel Participant's or Euroclear
Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global
Securities to the respective Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available
to the DTC seller on the settlement date. Thus, to the DTC Participant a
cross-market transaction will settle no differently than a trade between
two DTC Participants.
<PAGE>
Trading between Cedel or Euroclear seller and DTC purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in
which Global Securities are to be transferred by the respective clearing
system, through the respective Depositary, to a DTC Participant. The seller
will send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. In
these cases, Cedel or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's
account against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date. The payment will then be reflected in the
account of the Cedel Participant or Euroclear Participant the following
day, and receipt of the cash proceeds in the Cedel Participant's or
Euroclear Participant's account would be back-valued to the value date
(which would be the preceding day, when settlement occurred in New York).
Should the Cedel Participant or Euroclear Participant have a line of credit
with its respective clearing system and elect to be in debit in
anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft charges incurred over that
one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would instead be valued as
of the actual settlement date. Finally, day traders that use Cedel or
Euroclear and that purchase Global Securities from DTC Participants for
delivery to Cedel Participants or Euroclear Participants should note that
these trades would automatically fail on the sale side unless affirmative
action were taken. At least three techniques should be readily available to
eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until
the purchase side of the day trade is reflected in their Cedel or
Euroclear accounts) in accordance with the clearing system's
customary procedures;
A-2
<PAGE>
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would
give the Global Securities sufficient time to be reflected in their
Cedel or Euroclear account in order to settle the sale side of the
trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the sale
to the Cedel Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
Subject to the discussion below concerning final withholding tax
regulations, a beneficial owner of Global Securities holding securities
through Cedel or Euroclear (or through DTC if the holder has an address
outside the U.S.) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue
discount) on registered debt issued by U.S. Persons, unless (i) each
clearing system, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business in the chain of
intermediaries between such beneficial owner and the U.S. entity required
to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of
Securities that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status). If the information shown on Form W-8 changes, a new Form W-8 must
be filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income
(Form 4224). A non-U.S. Person, including a non-U.S. corporation or bank
with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are Security Owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing
Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty
provides only for a reduced rate, withholding tax will be imposed at that
rate unless the filer alternatively files Form W-8. Form 1001 may be filed
by the Security Owner or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Security Owner of a
Global Security or in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom
it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8 and Form 1001 are effective for
three calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership (unless the IRS provides
otherwise by Treasury regulations) organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate or, for
taxable years beginning before January 1, 1997, a trust the income of which
is includible in gross income for United States tax purposes, regardless of
its source or, (iv) for taxable years beginning after December 31, 1996, a
trust if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the authority
to control all substantial decisions of the trust. This summary does not
deal with all aspects of U.S. Federal income tax withholding that may be
relevant to foreign holders of the Global Securities. Investors are advised
to consult their own tax advisers for specific tax advice concerning their
holding and disposing of the Global Securities.
<PAGE>
On October 6, 1997, final Treasury regulations (the "Withholding Tax
Regulations") were issued that modify certain of the filing requirements
with which non-U.S. persons must comply in order to be entitled to an
exemption from U.S. withholding tax or a reduction to the applicable U.S.
withholding tax rate. Those persons
A-3
<PAGE>
currently required to file Form W-8 generally will continue to be required
to file that form. However, the requirement that non-U.S. persons submit
Form W-8 is extended to most non-U.S. persons who wish to seek an exemption
from withholding tax on the basis that income from the Global Securities is
effectively connected with the conduct of a U.S. trade or business (in lieu
of Form 4224) and to non-U.S. persons wishing to rely on a tax treaty to
reduce the withholding tax rate (in lieu of Form 1001). The Withholding Tax
Regulations generally are effective for payments of interest due after
December 31, 1998, but Forms 4224 and 1001 filed prior to that date will
continue to be effective until the earlier of December 31, 1999 or the
current expiration date of those forms. Prospective investors are urged to
consult their tax advisors with respect to the effect of the Withholding
Tax Regulations.
A-4
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED __________, ____
[PRELIMINARY GRANTOR TRUST PROSPECTUS SUPPLEMENT FORM]
(To Prospectus dated __________, ____)
[$_____________]
PARAGON AUTO RECEIVABLES GRANTOR TRUST ____ - _
Issuer
$_____________ ____% Asset Backed Certificates, Class A
$______________ ____% Asset Backed Certificates, Class B
PARAGON AUTO RECEIVABLES CORPORATION
Seller
PARAGON ACCEPTANCE CORPORATION
Servicer
The Paragon Auto Receivables Grantor Trust _____-__ (the "Trust")
will be formed pursuant to a Pooling and Servicing Agreement, to be dated
as of _________, _____, among Paragon Auto Receivables Corporation, as
seller (the "Seller"), Paragon Acceptance Corporation in its capacity as
servicer (in such capacity, the "Servicer"), and ___________, as Trustee.
The Trust will issue $_________ aggregate principal amount of ____% Asset
Backed Certificates, Class A (the "Class A Certificates"), and $________
aggregate principal amount of ____% Asset Backed Certificates, Class B (the
"Class B Certificates" and, together with the Class A Certificates, the
"Certificates"). The Class A Certificates will evidence in the aggregate an
approximate ___% undivided ownership in the Trust and the Class B
Certificates will evidence in the aggregate an approximate ___% undivided
ownership interest in the Trust. The rights of the Class B
Certificateholders to receive distributions with respect to the Receivables
are subordinated to the rights of the Class A Certificateholders to the
extent described herein. See "Description of the
Certificates--Distributions." The assets of the Trust will include a pool
of motor vehicle retail installment contracts (the "Receivables") secured
by new or used automobiles, light duty trucks and sports utility vehicles,
all monies due or received thereunder or with respect thereto after
_________, _____, security interests in the vehicles financed thereby, any
proceeds from claims on insurance policies with respect to the financed
vehicles, certain rights under dealer agreements and certain other
agreements, rights with respect to deposit accounts in which collections
are held,[monies on deposit in a trust account (the "Pre-Funding Account")
to be established with the Trustee] and the proceeds of the foregoing.
[Distributions on Class B Certificates will be subordinated to
distributions on Class A Certificates to the extent described herein.]
[Additional Receivables (the "Subsequent Receivables") will be purchased by
the Trust from the Seller from time to time on or before __________, _____
from funds on deposit in the Pre-Funding Account.]
(cover continued on following next page)
------------------
Prospective investors should consider the material risks involved with an
investment in the securities discussed in the"Risk Factors" set forth at
page S-__ herein and at page ___ in the accompanying Prospectus (the
"Prospectus"). [Material risks associated with the Subsequent Receivables
are described at page __ of the accompanying Prospectus.]
<PAGE>
THE CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO
NOT REPRESENT OBLIGATIONS OF OR INTERESTS IN PARAGON AUTO RECEIVABLES
CORPORATION, PARAGON ACCEPTANCE CORPORATION OR ANY OF THEIR AFFILIATES.
NEITHER THE CERTIFICATES NOR THE RECEIVABLES ARE INSURED OR GUARANTEED BY
PARAGON AUTO RECEIVABLES CORPORATION, PARAGON ACCEPTANCE CORPORATION OR ANY
OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting
Price to Discounts and Proceeds to
Public(1) Commissions the Seller(1)(2)
---------- ------------- -----------------
Per Class A Certificate % % %
Per Class B Certificate % % %
Total $____________ $____________ $____________
- - --------------------------
(1) Plus accrued interest, if any, from _______, _____.
(2) Before deducting expenses, estimated to be $_________.
------------------
The Certificates are offered by the Underwriters when, as and if issued and
accepted by the Underwriters and subject to their right to reject orders in
whole or in part. It is expected that delivery of the Certificates will be
made in book-entry
S-1
<PAGE>
form through the Same Day Funds Settlement System of The Depository Trust
Company, or through Cedel Bank, societe anonyme or the Euroclear System, on
or about _______, _____.
Capitalized terms used in this Prospectus Supplement are defined
in this Prospectus Supplement on the pages indicated in the "Index of
Terms" on page ___ of this Prospectus Supplement or, to the extent not
defined herein, have the meanings assigned to such terms in the Prospectus.
Principal and interest to the extent of the Class A Certificate Rate or
Class B Certificate Rate, as appropriate, will be distributed on the [15th]
day of each month (the "Payment Date") commencing ____________, _____. The
Final Scheduled Payment Date on the Certificates will be in _____________,
_____ (the "Final Scheduled Payment Date").
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION
ABOUT THE OFFERING OF THE CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED
IN THE PROSPECTUS, AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE CERTIFICATES
MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT
OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES DESCRIBED IN THIS
PROSPECTUS SUPPLEMENT, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
There is currently no secondary market for the Certificates
offered hereby and there is no assurance that one will develop. Each
Underwriter expects, but it is not obligated, to make a market in the
Certificates. There can be no assurance that a secondary market will
develop, or that it will provide Certificateholders with liquidity of
investment or that it will continue for the life of the Certificates
offered hereby.
REPORTS TO CERTIFICATEHOLDERS
Unless and until Definitive Certificates are issued, monthly
unaudited reports containing information concerning the Receivables will be
prepared by the Servicer and sent on behalf of the Trust only to Cede &
Co., as nominee of the Depository Trust Company and registered holder of
the Certificates. If Definitive Certificates are issued, these reports will
be sent on behalf of the Trust directly to each Certificateholder at its
registered address on file with the Trustee. See "Certain Information
Regarding the Securities--Book-Entry Registration" and "--Reports to
Securityholders" in the accompanying Prospectus. Such reports will not
constitute financial statements prepared in accordance with generally
accepted accounting principles. The Seller, as originator of the Trust,
will file with the Securities and Exchange Commission (the "Commission")
such periodic reports as are required under the Securities Exchange Act of
1934, as amended, and the rules and regulations of the Commission
thereunder. In addition, the Commission maintains a public access site on
the Internet through the World Wide Web at which site reports, information
statements and other information, including all electronic filings, may be
viewed. The Internet address of such World Wide Web site is
http://www.sec.gov.
S-2
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and
in the Prospectus. Capitalized terms used and not defined in this summary
are defined elsewhere in this Prospectus Supplement on the pages indicated
in the "Index of Terms" beginning at page S-__ or, to the extent not
defined herein, are defined in the Prospectus.
Issuer....................... Paragon Auto Receivables Grantor Trust ____-_
(the "Trust" or the "Issuer"), a trust
established pursuant to a Pooling and
Servicing Agreement, to be dated as of
______, _____ (as amended and supplemented
from time to time, the "Agreement"), among
the Seller, the Servicer and the Trustee.
Seller....................... Paragon Auto Receivables Corporation, a
Delaware corporation (the "Seller"). See
"The Seller."
Servicer..................... Paragon Acceptance Corporation, a Delaware
corporation ("Paragon" or in its capacity as
servicer, the "Servicer").
Trustee...................... _________________________, a ____________
banking corporation, as trustee under the
Agreement (the "Trustee"). The principal
offices of the Trustee from which
information regarding the Trust and the
Certificates are located at ---------------.
The Certificates............. The Trust will issue Asset Backed Certificates
pursuant to the Agreement in an aggregate
initial principal amount of $_______. The
Certificates represent fractional undivided
interests in the Trust.
The Certificates will consist of $_____
aggregate principal amount of ____% Asset
Backed Certificates, Class A (the "Class A
Certificates"), and $_____ aggregate
principal amount of ____% Asset Backed
Certificates, Class B (the "Class B
Certificates"). The Trust assets will
include: (i) specified motor vehicle retail
installment contracts (collectively, the
"Receivables") secured by new or used
automobiles, light duty trucks and sports
utility vehicles (the "Financed Vehicles");
(ii) all monies received thereunder after
__________, _____ (the "Cutoff Date"); (iii)
security interests in the Financed Vehicles
securing the Receivables; (iv) any proceeds
from claims on certain insurance policies,
refunds for costs of service policies or
contracts, refunds of unearned premiums with
respect to certain insurance policies and
any recourse to Dealers for any of the
foregoing; (v) certain rights under Dealer
Agreements; (vi) certain Eligible Accounts
in which collections are held; and (vii) all
income from and proceeds of the foregoing.
The Certificates will be issued in fully
registered form in denominations of $1,000
and integral multiples thereof.
The Class A Certificates will evidence in the
aggregate an approximate ___% undivided
ownership interest (the "Class
S-3
<PAGE>
A Percentage") in the Trust, and the Class B
Certificates will evidence in the aggregate
an approximate _____% undivided ownership
interest (the "Class B Percentage") in the
Trust. The Class B Certificates are
subordinated to the Class A Certificates to
the extent described herein. See
"Description of the
Certificates--Distributions."
The Receivables.............. On __________, _____ (the "Closing Date"),
pursuant to the Agreement, the Trust will
purchase from the Seller Receivables having
an aggregate principal balance of
approximately $______________ as of the
Cutoff Date.
The Receivables consist of motor vehicle
retail installment contracts between an
Obligor and a Dealer. See "The Receivables
Pool" herein and "The Receivables Pools" in
the Prospectus.
The Receivables have been selected from the
motor vehicle receivables owned by Paragon
based on the criteria specified in the
Agreement and described herein and in the
Prospectus. See "The Receivables Pool"
herein and "The Receivables Pools" in the
Prospectus. No Receivable has or will have a
scheduled maturity that, after giving
prospective effect to any permitted
extensions or deferrals, would be later than
_________, _____ (the "Final Scheduled
Maturity Date"). As of the Cutoff Date, the
weighted average annual percentage rate of
the Receivables was approximately ______%
per annum, the weighted average remaining
term to maturity of the Receivables was
approximately _____ months and the weighted
average original term to maturity of the
Receivables was approximately _____ months.
As of the Cutoff Date, approximately _____%
of the aggregate principal balance of the
Receivables represented financing of new
vehicles and the remainder represented
financing of used vehicles.
The"Aggregate Principal Balance" means, at any
time, the sum of the outstanding Principal
Balances of the Receivables. "Principal
Balance" means, with respect to any
Receivable, as of any date, the Amount
Financed minus that portion of all payments
(including all scheduled payments and any
prepayments in full or partial prepayment)
received on or prior to such date and
allocable to principal in accordance with
the simple interest method. "Amount
Financed" means, with respect to a
Receivable, the "amount financed" within the
meaning of the Federal Truth-in-Lending Act,
which is the aggregate amount of credit
initially extended under such Receivable
toward the purchase price of the Financed
Vehicle and related costs, including amounts
of credit extended in respect of
accessories, insurance premiums, service and
warranty policies or contracts and other
items customarily financed as part of motor
vehicle retail installment contracts.
S-4
<PAGE>
Terms of the Certificates
A. Payment Dates........... Distributions with respect to the Certificates
will be made on the 15th day of each month
or, if any such day is not a Business Day,
on the next succeeding Business Day (each, a
"Payment Date"), commencing __________,
_____. Distributions will be made to
Certificateholders of record as of the
Business Day preceding the applicable
Payment Date (each, a "Record Date").
"Business Day" means any day other than a
Saturday, Sunday or other day on which
commercial banking institutions or trust
companies in St. Louis, Missouri, Los
Angeles, California, New York, New York or
_____________, _____________ are authorized
or required to be closed. "Collection
Period" means (a) the period from (but not
including) the Cutoff Date to and including
__________, _____ and (b) thereafter, each
calendar month during the term of the
Agreement.
B. Class A
Certificate Rate ____% per annum (the "Class A Certificate Rate").
C. Class B
Certificate Rate ____% per annum (the "Class B Certificate Rate").
D. Interest................ On each Payment Date, interest at the Class A
Certificate Rate on the Class A Certificate
Balance and interest at the Class B
Certificate Rate on the Class B Certificate
Balance, in each case as of the immediately
preceding Payment Date (after giving effect
to all payments of principal made on such
preceding Payment Date) will be paid to the
holders of record of the Class A
Certificates ("Class A Certificateholders")
and the holders of record of the Class B
Certificates ("Class B Certificateholders";
the Class A Certificateholders and the Class
B Certificateholders are collectively
referred to herein as the
"Certificateholders") as of the Record Date
to the extent that sufficient funds are on
deposit for such Payment Date in the
Collection Account or available in the
Reserve Account to make such distribution.
See "Description of the
Certificates--Distributions" and
"--Accounts" herein. The rights of Class B
Certificateholders to receive payments of
interest will be subordinated to the rights
of the Class A Certificateholders to receive
payments of interest to the extent described
herein. See "Description of the
Certificates--Distributions." Interest in
respect of a Payment Date will accrue from
the preceding Payment Date (or, for the
first Payment Date, from ______, _____) to
and including such Payment Date.
E. Principal............... On each Payment Date, all payments of
principal on the Receivables received by the
Servicer during the preceding Collection
Period, as described more fully herein, plus
an amount equal to the aggregate principal
balance of any Receivables which became
Defaulted Receivables during the preceding
Collection Period, will be distributed by
the Trustee pro rata to the Class A
Certificateholders and to the Class B
Certificateholders of record on the
preceding Record Date, to the extent that
sufficient funds are on deposit in the
S-5
<PAGE>
Collection Account or available in the Reserve
Account to make such distribution. See
"Description of the
Certificates--Distributions" and
"--Accounts." The rights of the Class B
Certificateholders to receive payments of
principal will be subordinated to the rights
of the Class A Certificateholders to receive
payments of interest and principal to the
extent described herein. See "Description of
the Certificates--Distributions." The "Class
A Certificate Balance" and "Class B
Certificate Balance" will initially equal
$________ and $_________, respectively, and,
in each case, will thereafter equal the
initial Class A Certificate Balance or the
initial Class B Certificate Balance, as the
case may be, reduced by all principal
distributions on the Class A Certificates
and the Class B Certificates, respectively.
F. Optional Repurchase
of the Receivables;
Prepayment.............. The Servicer may purchase all the Receivables
and other Trust property on any Payment Date
if, as of the related Accounting Date, the
Aggregate Principal Balance has declined to
less than 10% of the Initial Pool Balance.
In such event, on the related Payment Date,
the Certificateholders will receive as a
prepayment in full an amount equal to the
Certificate Balance plus accrued and unpaid
interest thereon at the Certificate Rate.
The "Initial Principal Balance" will equal
the Aggregate Principal Balance as of the
Cutoff Date. See "Description of the
Certificates--Optional Repurchase of
Receivables; Prepayment."
Subordination of
Class B
Certificates................. Distributions of interest and principal on the
Class B Certificates will be subordinated in
priority of payment to interest and
principal due on the Class A Certificates to
the extent described herein. See
"Description of the
Certificates--Distributions." The Class B
Certificateholders will not receive any
distributions of interest with respect to a
Collection Period until the full amount of
interest on the Class A Certificates
relating to such Collection Period has been
deposited in the Class A Distribution
Account. The Class B Certificateholders will
not receive any distributions of principal
with respect to such Collection Period until
the full amount of interest on and principal
of the Class A Certificates relating to such
Collection Period has been deposited in the
Class A Distribution Account. See "Risk
Factors--Risks related to Subordination" and
"--Risks related to Limited Assets of Trust"
in the Prospectus.
[Pre-Funding Account]........ [During the period (the "Funding Period") from
and including the Closing Date until the
earliest of (i) the Determination Date on
which (a) the Pre-Funded Amount is less than
$________, (b) an Event of Default has
occurred under the Indenture or a Servicer
Termination Event has occurred under the
Pooling and Servicing Agreement, (c) certain
events of insolvency have occurred with
respect to the Seller or the Servicer or
(ii) the close of business on the ________
S-6
<PAGE>
Payment Date, the Pre-Funded Amount will be
maintained in an account in the name of the
Indenture Trustee (the "Pre- Funding
Account"). The Pre-Funded Amount is expected
to initially equal approximately
$_____________ and, during the Funding
Period, will be reduced by the principal
balance of Subsequent Receivables purchased
by the Trust from time to time in accordance
with the Pooling and Servicing Agreement.
The Seller expects that the Pre-Funded
Amount will be reduced to less than
$_________ by the ________ Payment Date. Any
Pre-Funded Amount remaining at the end of
the Funding Period will be payable to the
Noteholders and Certificateholders pro rata
in proportion to the respective principal
balances of each class of Certificates. See
"Description of the Transfer and Servicing
Agreements -- Pre-Funding Account;
Subsequent Receivables."]
Reserve Account.............. A reserve account (the "Reserve Account") will
be created with an initial deposit by the
Seller of cash or certain investments having
a value of at least $________ (the "Reserve
Account Initial Deposit"). In addition, on
each Payment Date, any amounts on deposit in
the Collection Account with respect to the
preceding Collection Period after payments
to the Certificateholders, the Servicer and
the Trustee have been made will be deposited
into the Reserve Account until the amount on
deposit in the Reserve Account is equal to
the Reserve Account Required Amount.
On or prior to the Business Day preceding each
Payment Date (the "Deposit Date"), the
Trustee will withdraw funds from the Reserve
Account, to the extent of the funds therein,
to the extent (a) the sum of the amounts
required to be distributed to
Certificateholders and the Servicer on the
related Payment Date exceeds (b) the amount
on deposit in the Collection Account with
respect to the preceding Collection Period.
If the amount on deposit in the Reserve
Account is reduced to zero,
Certificateholders will bear the credit and
other risks associated with ownership of the
Receivables, including the risk that the
Trust may not have a perfected security
interest in the Financed Vehicles. See "Risk
Factors" herein and in the Prospectus,
"Description of the Certificates--Accounts"
herein and "Certain Legal Aspects of the
Receivables" in the Prospectus.
Material Federal Income
Consequences................. In the opinion of Mayer, Brown & Platt, the
Trust will be treated as a grantor trust for
federal income tax purposes and will not be
subject to federal income tax. Accordingly,
the Certificateholders will be treated as
owners of the Receivables for federal income
tax purposes. Certificateholders will report
their pro rata share of all income earned on
the Receivables (other than amounts, if any,
treated as "stripped coupons") and, subject
to certain limitations in the case of
Certificateholders who are individuals,
trusts, or estates, may deduct their pro
rata share of reasonable servicing and other
fees. See "Material Federal
S-7
<PAGE>
Income Tax Consequences" and "Certain State
Tax Consequences" herein and in the
Prospectus for additional information
concerning the application of federal and
state tax laws to the Trust and the
Securities.
ERISA Considerations......... Subject to the considerations discussed under
"ERISA Considerations" herein and in the
Prospectus, the Class A Certificates are
eligible for purchase by employee benefit
plans.
The Class B Certificates and any beneficial
interest in such Class B Certificates may
not be acquired with the assets of an
employee benefit plan subject to the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or with the
assets of an individual retirement account.
See "ERISA Considerations" herein and in the
Prospectus.
Ratings of the
Certificates..................It is a condition to the issuance of the Class
A Certificates that they be rated in the
highest investment rating category by at
least one nationally recognized rating
agency (the "Rating Agency"), and it is a
condition to the issuance of the Class B
Certificates that they be rated by at least
one nationally recognized rating agency in
the "A" category. The ratings of the
Certificates address the likelihood of the
timely payment of interest on and the
ultimate payment of principal of the
Certificates pursuant to their terms. These
ratings are not a recommendation to buy,
sell or hold the Certificates. There can be
no assurance that a rating will not be
lowered or withdrawn by a rating agency if
circumstances so warrant. See "Risk
Factors--Ratings of the Securities" in the
Prospectus and "Risk Factors--Ratings of the
Certificates" herein.
S-8
<PAGE>
RISK FACTORS
In addition to the other information contained herein and in the
Prospectus, prospective investors should consider carefully the following
risk factors and the information contained in "Risk Factors" in the
Prospectus.
Class B Certificates Subordinated to Class A Certificates
Distributions of interest and principal on the Class B
Certificates will be subordinated in priority of payment to interest on the
Class A Certificates. No distributions with respect to a Collection Period
will be made on the Class B Certificates until the full amount of interest
on and principal of the Class A Certificates on the related Payment Date
has been distributed to the Class A Certificateholders.
Payments Will Be Made Only from the Limited Assets of the Trust
The Trust will not have, nor is it permitted or expected to have,
any significant assets or sources of funds other than the Receivables and
the Reserve Account. Holders of the Certificates must rely for repayment
upon payments on the Receivables and, if and to the extent available,
amounts on deposit in the Reserve Account. Similarly, although funds in the
Reserve Account will be available on each Payment Date to cover shortfalls
in distributions of interest and principal on the Certificates, amounts to
be deposited in the Reserve Account are limited in amount. If the Reserve
Account is exhausted, the Trust will depend solely on current distributions
on the Receivables to make payments on the Certificates.
Amounts on deposit in the Reserve Account will be available on any
Payment Date first to cover payment of Servicing Fees to the Servicer, then
shortfalls in distributions of interest on the Class A Certificates and
then shortfalls in distributions of interest on the Class B Certificates.
After distributions of interest on the Certificates have been made, the
remaining amounts on deposit in the Reserve Account will be available first
to cover shortfalls in distributions of principal on the Class A
Certificates and then shortfalls in distributions of principal on the Class
B Certificates. If the Reserve Account is exhausted, the Trust will depend
solely on payments on the Receivables to make distributions on the
Certificates, and Certificateholders will bear the risk of delinquency,
losses and repossessions with respect to the Receivables. There can be no
assurance that the future delinquency, loss and repossession experience of
the Trust with respect to the Receivables will be better or worse than that
set forth herein with respect to the Receivables serviced by the Servicer.
Any amounts released from the Reserve Account to the Seller will not be
available to the Certificateholders. See "The Receivables Pool--Pool
Composition" and "Delinquency and Net Losses" and "The Receivables Pools"
in the Prospectus and "Description of the Certificates--Reserve Account"
and "Distributions."
Certificateholders Bear Reinvestment Risk and Payment Delay Risk Due to
Variations in Payment Rates on Receivables
As the rate of payment of principal of each class of the
Certificates depends on the rate of payment (including prepayments) of the
principal balance of the Receivables, the final distribution in respect of
each class of the Certificates could occur significantly earlier than the
Final Scheduled Payment Date. It is expected that the final distribution in
respect of the Certificates will occur on or prior to the Final Scheduled
Payment Date. However, if sufficient funds are not available to reduce the
aggregate Certificate Balance of either class of Certificates to zero on or
prior to the Final Scheduled Payment Date, the final distribution in
respect of such class of Certificates could occur later than such date. See
"Weighted Average Life of the Certificates" herein and "Weighted Average
Life of the Securities" in the Prospectus.
S-9
<PAGE>
Variations in Regional Economic Conditions May Cause Payment Reductions
or Delays
SIGNIFICANT GEOGRAPHIC CONCENTRATION MAY INCREASE THE EXPOSURE OF
THE TRUST TO THE ECONOMIC CONDITIONS IN CERTAIN STATES. Economic conditions
in states where Obligors reside may affect the delinquency, loss and
repossession experience of the Trust with respect to the Receivables.
Obligors on Receivables representing approximately ___%, ___%, ___% and
___% by principal balance of the Receivables were located in ________,
________, ________ and ________ at the Cutoff Date. As a result, economic
conditions in such states may have a disproportionate effect on prepayments
and/or defaults in respect of the Receivables and thus on amounts available
for distribution to Certificateholders. In particular, an economic downturn
in one or more of such states could adversely affect the performance of the
Trust as a whole (even if national economic conditions remain unchanged or
improve) as obligors in such state or states experience the effects of such
a downturn and face greater difficulty in making payments on their Financed
Vehicles. See "The Receivables Pool" herein.
Ratings of the Certificates Do Not Address Suitability of Investment
It is a condition to the issuance of the Class A Certificates that
they be rated in the highest investment rating category by at least one
Rating Agency, and it is a condition to the issuance of the Class B
Certificates that they be rated by at least one Rating Agency in the "A"
category. A rating is not a recommendation to purchase, hold or sell the
Certificates, inasmuch as such rating does not comment as to market price
or suitability for a particular investor. The ratings of the Certificates
address the likelihood of the payment of principal and interest on the
Certificates pursuant to their terms. There can be no assurance that a
rating will remain for any given period of time or that a rating will not
be lowered or withdrawn entirely by a Rating Agency if in its judgment
circumstances in the future so warrant.
THE TRUST
The Seller will establish the Trust by selling and assigning the
Trust property, as described below, to the Trustee in exchange for the
Certificates. The Servicer will service the Receivables pursuant to the
Agreement and will be compensated for acting as the Servicer. See
"Description of the Certificates--Servicing Compensation and Payment of
Expenses." To facilitate servicing and to minimize administrative burden
and expense, the Servicer will be appointed to act as custodian for the
Receivables originated by it or purchased by it from a Dealer, but the
Trustee will not stamp the Receivables to reflect the sale and assignment
of the Receivables to the Trust or amend the certificates of title to the
Financed Vehicles. In the absence of amendments to the certificates of
title, the Trustee may not have perfected security interests in the
Financed Vehicles securing the Receivables originated in some states.
See "Certain Legal Aspects of the Receivables" in the Prospectus.
If the protection provided to the investment of the
Certificateholders by the Reserve Account and, in the case of the Class A
Certificateholders, the subordination of the Class B Certificates, is
insufficient, the Trust will look only to the Obligors on the Receivables,
the proceeds from the repossession and sale of Financed Vehicles which
secure defaulted Receivables and the proceeds from any Dealer Recourse. In
such event, certain factors, such as the Trust's not having first priority
perfected security interests in some of the Financed Vehicles, may affect
the Trust's ability to realize on the collateral securing the Receivables,
and thus may reduce the proceeds to be distributed to Certificateholders
with respect to the Certificates. See "Description of the
Certificates--Distributions" and "--Accounts" herein and "Certain Legal
Aspects of the Receivables" in the Prospectus.
Each Certificate represents a fractional undivided ownership
interest in the Trust. The Trust property includes retail installment sale
contracts secured by new or used automobiles, light duty trucks or sports
utility vehicles, and all payments received thereunder after the Cutoff
Date. The Trust property also includes (a) such amounts as from time to
time may be held in one or more trust accounts established and maintained
by the Servicer pursuant to the Agreement, as described below; (b) security
interests in the Financed Vehicles and any accessions thereto; (c) the
rights to proceeds with respect to the Receivables from claims on insurance
policies covering the
S-10
<PAGE>
Financed Vehicles; (d) any property that shall have secured a Receivable
and that shall have been acquired by the Trustee; (e) any Dealer Recourse
and any other rights of Paragon under Dealer Agreements; (f) rights under
the Purchase Agreement; (g) the Seller's rights to certain documents and
instruments relating to the Receivables; (h) certain rebates of premiums
and other amounts relating to certain insurance policies and other items
financed under the Receivables; and (i) any and all proceeds of the
foregoing. The Reserve Account will be maintained by the Trustee for the
benefit of the Certificateholders, but will not be part of the Trust.
THE RECEIVABLES POOL
The Receivables were purchased or originated by Paragon in the
ordinary course of its business. The pool of Receivables (the "Receivables
Pool") will consist of Receivables purchased by the Trust as of the Cutoff
Date. The Receivables have been selected from the Receivables portfolio of
Paragon for inclusion in the Receivables Pool by several criteria, some of
which are set forth in the Prospectus under "The Receivables Pool," as well
as the requirement that each Receivable: (a) had no amount due 10% or more
of which was more than 29 days past due as of the Cutoff Date; (b) has an
APR of not less than _____% and not more than _____%; [(c) provides for
level monthly payments that fully amortize the amount financed over an
original term of at least _____ months and not more than ____ months
(provided payments are made on the applicable due dates);] (d) had an
outstanding Principal Balance as of the Cutoff Date of not less than
$_______ and not more than $_______; and (e) had a remaining term as of the
Cutoff Date of at least ___ months and not more than ___ months. The
Receivables were originated on or before ________, ____. The composition of
the Receivables Pool as of the Closing Date will not deviate from the
composition of the Receivables Pool as of the Cutoff Date. No selection
procedures believed by the Seller to be adverse to the Certificateholders
were used in selecting the Receivables.
The tables below set forth information regarding the composition
and characteristics of the Receivables Pool as of the Cutoff Date.
S-11
<PAGE>
Composition of the Receivables
as of the Cutoff Date
Aggregate Principal Balance........................................$___________
Number of Receivables....................................................._____
Average Amount Financed............................................$___________
Range of Amounts Financed..........................$___________ to $___________
Average Remaining Principal Balance................................$___________
Range of Remaining Principal Balances..............$___________ to $___________
Weighted Average APR....................................................._____%
Range of APRs.................................................._____% to _____%
Weighted Average Original Term to Maturity (1)......................____ months
Range of Original Terms to Maturity.........................____ to ____ months
Weighted Average Remaining Term to Maturity (1).....................____ months
Range of Remaining Terms to Maturity........................____ to ____ months
New Vehicles (Percentage of Aggregate Principal Balance)..................____%
Used Vehicles (Percentage of Aggregate Principal Balance).................____%
(1) Rounded to the nearest month.
S-12
<PAGE>
Distribution of the Receivables by APR
as of the Cutoff Date
Percentage
Aggregate by Aggregate Percentage
Principal Principal Number of by Number of
APR Range Balance Balance Receivables Receivables (1)
--------------- ------------ ----------- ------------ ---------------
% $ % %
___________ _______ _________ ________
TOTAL $ 100.00% 100.00%
(1) Percentages may not add up to 100.00% because of rounding.
Distribution of Receivables by Principal Place of Business of Dealer
as of the Cutoff Date
Percentage
by Aggregate Percentage
Aggregate Principal Number of by Number of
State Principal Balance Balance (1) Receivables Receivables (1)
- - ----- ----------------- ----------- -------------- -------------
$ % %
___________ _______ _________ ________
TOTAL $ 100.00% 100.00%
(1) Percentages may not add up to 100.00% because of rounding.
S-13
<PAGE>
Distribution by Original Term to Scheduled Maturity of the Receivables
as of the Cutoff Date
Percentage
Aggregate by Aggregate Percentage
Principal Principal Number of by Number of
Range of Original Terms Balance Balance (1) Receivables Receivables(1)
- - --------------------- ------- ------------ ----------- -------------
to months $ % %
to months
to months
to months
to months
to months
to months
to months
to months
months
-------- -------- ---------- -----------
TOTAL $ 100.00% 100.00%
(1) Percentages may not add up to 100.00% because of rounding.
Distribution by Remaining Term to Scheduled Maturity of the Receivables
as of the Cutoff Date
Percentage
Aggregate by Aggregate Percentage
Range of Principal Principal Number of by Number of
Remaining Terms Balance Balance (1) Receivables Receivables (1)
- - --------------- -------- ------------- ----------- -------------
to months $ % %
to months
to months
to months
to months
to months
to months
to months
to months
to months
months
----------- ---------- --------- -------
TOTAL $ 100.00% 100.00%
(1) Percentages may not add up to 100.00% because of rounding.
S-14
<PAGE>
Distribution of Receivables by Amount Financed
as of the Cutoff Date
Percentage
Aggregate by Aggregate Percentage
Principal Principal Number of by Number of
Amount Financed Balance Balance (1) Receivables Receivables(1)
- - --------------- ------- ------- ----------- ------------
$5,000.00 to $9,999.99 $ % %
$10,000.00 to $14,999.99
$15,000.00 to $19,999.99
$20,000.00 to $24,999.99
$25,000.00 to $29,999.99
$30,000.00 to $34,999.99
$35,000.00 to $39,999.99
$40,000.00 to $44,999.99
$45,000.00 to $49,999.99
$50,000.00 to $54,999.99
$55,000.00 to $59,999.99
$60,000.00 to $64,999.99
$65,000.00 to $69,999.99
$100,000.00 and above
-------- --------- ---------- -------
TOTAL $ 100.00% 100.00%
(1) Percentages may not add up to 100.00% because of rounding.
Distribution of Receivables by Current Principal Balance
as of the Cutoff Date
Percentage
Aggregate by Aggregate Percentage
Current Principal Principal Number of by Number of
Principal Balance Balance Balance (1) Receivables Receivables(1)
- - ----------------- ------- ------- ----------- -----------
$5,000.00 to $9,999.99 $ % %
$10,000.00 to $14,999.99
$15,000.00 to $19,999.99
$20,000.00 to $24,999.99
$25,000.00 to $29,999.99
$30,000.00 to $34,999.99
$35,000.00 to $39,999.99
$40,000.00 to $44,999.99
$45,000.00 to $49,999.99
$50,000.00 to $54,999.99
$55,000.00 to $59,999.99
$60,000.00 to $64,999.99
$95,000.00 to $99,999.99
---------- --------- -------- --------
TOTAL $ 100.00% 100.00%
(1) Percentages may not add up to 100.00% because of rounding.
S-15
<PAGE>
Delinquencies and Loss Experience
The following tables set forth information relating to the
delinquency and loss experience of Paragon for the periods indicated. There
is no assurance that the delinquency and credit loss experience with
respect to Paragon's automobile, light duty truck and sports utility
vehicle installment contracts in the future, or that the experience of the
Receivables owned by the Trust and pledged to the Indenture Trustee for the
benefit of the [Note][Security] holders, will be similar to that set forth
below.
Paragon began acquiring contracts in August of 1996.
Delinquencies, repossessions and net losses have increased steadily since
that time due to seasoning of the pool of contracts. Fluctuations in
delinquencies, repossessions and losses generally follow trends in the
overall economic environment and may be affected by such factors as
increased competition for obligors, the supply of and demand for
automobiles, light duty trucks and sports utility vehicles, rising consumer
debt burden per household and increases in personal bankruptcies. The
credit enhancement for the Trust has been designed to protect
[Note][Security] holders against increases in delinquencies and losses. If,
however, any such increase is greater than anticipated, delays in payments
of collections of the Receivables could occur or reductions in the amount
of payments to [Note][Security] holders could result.
For a description of Paragon's underwriting and collections
practices, see "The Receivables Pools--Underwriting" and "--Servicing and
Collections" in the Prospectus.
S-16
<PAGE>
<TABLE>
<CAPTION>
PARAGON ACCEPTANCE CORPORATION
Historical Delinquency Experience
As of
9/30/96 12/31/96 3/31/97 6/30/97 9/30/97
------- -------- ------- ------- -------
Aggregate Principal No. of contracts 77 486 1,180 2,090 3,292
Balance at Period End(1)Amount ($) 1,169,188 7,889,627 19,105,772 33,882,836 53,902,072
----------------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Delinquencies
30 - 59 days No. of contracts 0 2 4 14 47
Pay Off Balance ($) 0 21,084 68,810 283,003 723,757
% of Principal 0.00% 0.27% 0.36% 0.84% 1.34%
60 - 89 days No. of contracts 0 0 0 3 3
Pay Off Balance ($) 0 0 0 34,773 33,718
% of Principal 0.00% 0.00% 0.00% 0.10% 0.06%
90 days or more No. of contracts 0 0 0 0 3
Pay Off Balance ($) 0 0 0 0 49,982
% of Principal 0.00% 0.00% 0.00% 0.00% 0.09%
------- ------ ------ ------- --------
Total Delinquencies No. of contracts 0 2 4 17 53
Pay Off Balance ($) 0 21,084 68,810 317,776 807,457
% of Principal 0.00% 0.27% 0.36% 0.94% 1.50%
Amount in No. of vehicles 0 0 2 6 4
Repossession Pay Off Balance ($) 0 0 33,804 105,815 94,154
Inventory % of Principal 0.00% 0.00% 0.18% 0.31% 0.17%
------- ------ ------ ------- --------
Total Delinquencies No. of contracts &
and Amount in vehicles 0 2 6 23 57
Repossession Pay Off Balance ($) 0 21,084 102,614 423,591 901,611
% of Principal 0.00% 0.27% 0.54% 1.25% 1.67%
======= ====== ======= ======= ========
<CAPTION>
PARAGON ACCEPTANCE CORPORATION
Historical Delinquency Experience
12/31/97 3/31/98 6/30/98 9/30/98
-------- ------- ------- -------
4,576 6,471 8,667 10,435
75,755,941 107,228,391 145,663,968 176,207,183
----------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Delinquencies
30 - 59 days No. of contracts 66 68 132 136
Pay Off Balance ($) 1,031,132 1,189,755 2,213,174 2,231,656
% of Principal 1.36% 1.11% 1.52% 1.27%
60 - 89 days No. of contracts 10 13 22 37
Pay Off Balance ($) 160,904 219,789 405,439 565,302
% of Principal 0.21% 0.21% 0.28% 0.32%
90 days or more No. of contracts 1 7 4 10
Pay Off Balance ($) 14,185 111,797 92,083 143,667
% of Principal 0.02% 0.10% 0.06% 0.08%
--------- --------- --------- ---------
Total Delinquencies No. of contracts 77 88 158 183
Pay Off Balance ($) 1,206,221 1,521,342 2,710,696 2,940,625
Amount in No. of vehicles 7 19 24 24
Repossession Pay Off Balance ($) 112,910 241,598 434,530 368,665
Inventory % of Principal 0.15% 0.23% 0.30% 0.21%
--------- --------- --------- ---------
Total Delinquencies No. of contracts &
and Amount in vehicles 84 107 182 207
Repossession Pay Off Balance ($) 1,319,131 1,762,940 3,145,226 3,309,290
% of Principal 1.74% 1.64% 2.16% 1.88%
========= ========= ========= =========
(1) Aggregate Principal Balance equals the net finance receivables for all contracts
serviced, excluding repossessed vehicles. The amounts are on a basis consistent
with Paragon's financial statement presentation of Contracts Held for Sale, and
consist of unamortized dealer participation and deferred initial direct costs,
reserve for losses and unearned finance charges on precomputed contracts.
S-17
<PAGE>
<CAPTION>
PARAGON ACCEPTANCE CORPORATION
Historical Net Loss Experience
During the Three-Month Period Ended
9/30/96 12/31/96 3/31/97 6/30/97 9/30/97 12/31/97
------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Average Aggregate
Principal Balance $443,904 $4,229,961 $13,791,251 $26,544,803 $43,690,638 $64,796,884
======== ========== =========== =========== =========== ===========
Gross Charge-Offs(1) $0 $0 $4,006 $42,227 $103,098 $228,598
Recoveries(2) $0 $0 $0 $985 $102 $80
----- ------- ------ ----- ------- ------
Net Losses $0 $0 $4,006 $41,242 $102,996 $228,518
===== ====== ====== ======== ======== ========
Net Losses as a Percentage
of Average Aggregate
Principal Balance(3) 0.00% 0.00% 0.03% 0.16% 0.24% 0.35%
===== ===== ===== ===== ===== =====
<CAPTION>
During the
During the Three-Month Period Ended Year Ended
3/31/98 6/30/98 9/30/98 9/30/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
Average Aggregate
Principal Balance $90,934,548 $126,481,513 $160,920,635 $111,068,155
=========== ============ ============ ============
Gross Charge-Offs(1) $235,758 $573,477 $577,162 $1,614,995
Recoveries(2) $23,224 $84,559 $189,766 $297,629
-------- ------- -------- --------
Net Losses $212,534 $488,918 $387,396 $1,317,366
======== ======== ======== ==========
Net Losses as a Percentage
of Average Aggregate
Principal Balance(3) 0.23% 0.39% 0.24% 1.19%
===== ===== ===== =====
</TABLE>
(1) Gross Charge-Offs are defined as principal balance at time of
charge-off less net sale proceeds.
(2) Recoveries are post charge-off amounts that are collected and
applied toward the obligors' deficiency balance.
(3) Percentages are not annualized.
S-18
<PAGE>
Year 2000 Compliance
The year 2000 issue is the result of computer programs
being written to store and process data using two digits rather than four
to define the applicable year. Any computer programs used by Paragon that
have date sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations. Paragon's critical
computer applications software is not maintained in-house. Rather, Paragon
operates under service agreements with outside vendors that provide Paragon
(and many other institutions) access to the applications that are
maintained by the vendors and run on the vendors' mainframe computers.
These critical applications have been certified as year 2000 compliant.
Paragon has also assessed the potential impact of year 2000 noncompliance
on the part of other external relationships and, subject to Paragon's
ongoing review of vendors' year 2000 compliance, Paragon is not aware at
this time of any such issues that would have a material adverse effect on
Paragon's financial position, cash flows or results of operations. As a
result, subject to Paragon's ongoing compliance efforts, the costs and
uncertainties relating to timely resolution of year 2000 issues applicable
to Paragon's business and operations are not reasonably expected by the
Seller to have a material adverse effect on Paragon's financial position,
cash flows or results of operations. The preceding two sentences are
forward-looking statements and the actual costs could differ materially
from the costs currently anticipated by Paragon.
THE SELLER, THE SERVICER AND PARAGON
The Seller is a wholly-owned subsidiary of Paragon. Information
regarding the Seller is set forth under "The Seller" in the Prospectus and
additional information about Paragon and the Servicer is set forth under
"Paragon and the Servicer" in the Prospectus. Paragon was incorporated in
the State of Delaware in November 1994 and began purchasing contracts in
August 1996. Paragon was initially capitalized with approximately
$8,400,000 in preferred and common stock held by an investment fund managed
by Triumph Capital Group, Inc. ("Triumph") and Paragon's senior management.
Triumph is a private investment management company founded in 1990 and
based in Boston, Massachusetts. Triumph manages three early stage and
mezzanine investment funds for institutional investors with capital
commitments equal to approximately $500,000,000. In April 1998, Paragon
issued approximately $14,000,000 in additional preferred and common stock
to three institutional investors not affiliated with Triumph. Other funding
sources available to Paragon include a warehouse lending facility provided
by ContiTrade Services, L.L.C. ("CTS"), and a $4,000,000 subordinated
lending facility also provided by CTS. CTS holds a warrant to purchase up
to approximately 7.5% of the common stock of Paragon.
WEIGHTED AVERAGE LIFE OF THE CERTIFICATES
Information regarding certain maturity and prepayment
considerations with respect to the Certificates is set forth under
"Weighted Average Life of the Securities" in the Prospectus. As the rate of
payment of principal of each class of the Certificates depends primarily on
the rate of payment (including prepayments and liquidations due to default)
of the aggregate principal balance of the Receivables, the final
distribution in respect of the Certificates could occur significantly
earlier than the Final Scheduled Payment Date. Consistent with its
customary servicing practices and procedures, the Servicer may, in its
discretion and on a case-by-case basis, arrange with Obligors to extend or
modify the terms of Receivables. Any such extension or modification will
have the effect of extending the weighted average life of the Certificates.
However, the Servicer will not be permitted to grant any such deferral or
extension if as a result the final scheduled payment on a Receivable would
fall after the Final Scheduled Maturity Date, unless the Servicer
repurchases such Receivable. Certificateholders will bear the risk of being
able to reinvest principal payments on the Certificates at yields at least
equal to the yield on their respective Certificates.
S-19
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the terms of the
Agreement, a form of which has been filed as an exhibit to the Registration
Statement. A copy of the Agreement will be filed with the Commission
following the issuance of the Certificates. The following summary
supplements the description of the general terms and provisions of the
Certificates of any given series and the related Agreement set forth in the
Prospectus, to which description reference is hereby made. The following
summary, together with the related description in the Prospectus, describes
all of the material terms of the Certificates and the Agreement, but it
does not purport to be complete and is subject to, and qualified by
reference to, all the provisions of the Certificates and the Agreement.
General
The Certificates will evidence interests in the Trust created
pursuant to the Agreement. The Class A Certificates will evidence in the
aggregate an undivided ownership interest of approximately ___% (the "Class
A Percentage") in the Trust and the Class B Certificates will evidence in
the aggregate an undivided ownership interest of approximately ___% (the
"Class B Percentage") in the Trust. In general, it is intended that Class A
Certificateholders receive, on each Payment Date, the Class A Percentage of
the Principal Distribution Amount plus interest at the Class A Certificate
Rate on the Class A Certificate Balance. Subject to the prior rights of the
Class A Certificateholders, it is intended that the Class B
Certificateholders receive, on each Payment Date, the Class B Percentage of
the Principal Distribution Amount plus interest at the Class B Certificate
Rate on the Class B Principal Certificate.
"Available Principal" for a Payment Date means the sum of
the following amounts with respect to the related Collection
Period: (a) that portion of the collections on the Receivables
received during the related Collection Period that is allocable to
interest in accordance with the Servicer's customary procedures;
(b) all Liquidation Proceeds received during such Collection
Period; and (c) all Purchase Amounts, each to the extent
attributable to accrued interest, of all Receivables that are
repurchased by the Seller or purchased by the Servicer under an
obligation which arose during the related Collection Period.
"Available Interest" for any Payment Date shall exclude all
payments and proceeds of any Receivables the Purchase Amount of
which has been distributed on a prior Payment Date.
"Defaulted Receivable" means, with respect to any
Collection Period, a Receivable (other than a Purchased
Receivable) which the Servicer has determined to charge off during
such Collection Period in accordance with its customary servicing
practices; provided, that any Receivable which the Seller or
Servicer is obligated to repurchase or purchase shall be deemed to
have become a Defaulted Receivable during a Collection Period if
the Seller or Servicer fails to deposit the Purchase Amount on the
related Deposit Date when due.
"Principal Distribution Amount" means, for any Payment
Date, the sum of the Available Principal for such Payment Date
plus the Realized Losses with respect to the related Collection
Period.
"Purchased Receivable" means, at any time, a Receivable
as to which payment of the Purchase Amount has previously been
made by the Seller or the Servicer pursuant to the Agreement.
"Realized Losses" means, for any Collection Period, the
aggregate principal balances of any Receivables that became
Defaulted Receivables during such Collection Period.
Optional Repurchase of the Receivables; Prepayment
If the Aggregate Principal Balance as of any Accounting Date has
declined to 10% or less of the Initial Principal Balance, the Seller may
purchase all remaining Trust Property on any Payment Date occurring in a
subsequent Collection Period and cause the prepayment of the Certificates
in an amount equal to the Certificate
S-20
<PAGE>
Balance plus accrued and unpaid interest thereon at the Certificate Rate.
See "Description of the Transfer and Servicing Agreements--Termination" in
the Prospectus.
Accounts
Separate Certificate Distribution Accounts will be established for
the Class A Certificates (the "Class A Distribution Account") and the Class
B Certificates (the "Class B Distribution Account"). In addition to those
accounts and a Collection Account for the Trust (see "Description of the
Transfer and Servicing Agreements--Accounts" in the Prospectus), the Seller
will also establish and maintain in the name of the Trustee, the Reserve
Account. The Reserve Account will be created with an initial deposit by the
Seller of cash or Eligible Investments having a value of at least equal to
the Reserve Account Initial Deposit. In addition, on each Payment Date, any
amounts on deposit in the Collection Account with respect to the preceding
Collection Period after payments to the Certificateholders and the Servicer
have been made will be deposited into the Reserve Account until the amount
on deposit in the Reserve Account is equal to the Reserve Account Required
Amount.
The Reserve Account will be an Eligible Account which the Seller
shall establish and maintain in the name of the Trustee. Funds on deposit
in the Reserve Account will be invested in Eligible Investments selected by
the Seller and, if permitted by the Rating Agency, funds on deposit in the
Reserve Account may be invested in Eligible Investments that mature later
than the next Deposit Date. The Reserve Account and any amounts therein
will not be property of the Trust, but will be pledged to and held for the
benefit of the Trustee, as secured party.
On each Deposit Date, the Trustee will withdraw funds from the
Reserve Account to the extent (a) the sum of the amounts required to be
distributed to Certificateholders and the accrued and unpaid Servicing Fees
payable to the Servicer on such Payment Date exceeds (b) the amount on
deposit in the Collection Account with respect to the preceding Collection
Period (net of investment income). Such deficiencies in the Collection
Account may result from, among other things, Receivables becoming Defaulted
Receivables or the failure by the Servicer to make any remittance required
to be made under the Agreement. The aggregate amount to be withdrawn from
the Reserve Account on any Deposit Date will not exceed the amount
available in the Reserve Account with respect to the related Payment Date.
The Trustee will deposit the proceeds of such withdrawal into the
Collection Account on or before the Payment Date with respect to which such
withdrawal was made.
Subject to reduction as described below, the "Reserve Account
Required Amount" means the greater of (i) _____% of the Aggregate Principal
Balance (after giving effect to any distributions on the Certificates on
such Payment Date) and (ii) the Floor Amount; provided, however, that if a
Trigger Event has occurred and has not been Deemed Cured, the Reserve
Account Required Amount will be ___% of the Aggregate Principal Balance
(after giving effect to any distributions on the Securities on such Payment
Date). The Reserve Account Required Amount may be reduced from time to time
if the Rating Agency has delivered prior written notice to the Seller, the
Servicer, the Indenture Trustee and the Owner Trustee that such reduction
will not result in a reduction, withdrawal or qualification of the Rating
Agency's then current ratings of each class of the Certificates. The time
necessary for the Reserve Account to reach and maintain the Reserve Account
Required Amount at any time after the Closing Date will be affected by the
delinquency, credit loss, repossession and prepayment experience of the
Receivables and, therefore, cannot be accurately predicted. Amounts on
deposit in the Reserve Account will be released to the Servicer on each
Payment Date to the extent that the amount on deposit in the Reserve
Account would exceed the Reserve Account Required Amount.
"Liquidation Proceeds" with respect to a Liquidated
Receivable means all amounts realized with respect to such
Receivable (other than amounts withdrawn from the Reserve Account)
net of (i) reasonable expenses incurred by the Servicer in
connection with the collection of such Receivable and the
repossession and disposition of the related Financed Vehicle and
(ii) amounts that are required to be refunded to the Obligor on
such Receivable; provided, however, that the Liquidation Proceeds
with respect to any Receivable will in no event be less than zero.
S-21
<PAGE>
"Floor Amount" with respect to any Payment Date means the
lesser of (i) the aggregate outstanding principal amount of the
Certificate Balance (after giving effect to any distributions on
the Certificates on such Payment Date) and (ii)
$__________________.
"Deficiency Claim Amount" means, with respect to any
Determination Date, the positive difference of (i) the sum of the
Servicing Fee for the related Collection Period and all accrued
and unpaid Servicing Fees for prior Collection Periods, the
Certificateholders' Interest Payment Amount and the
Certificateholders' Interest Payment Amount for such Payment Date
minus (ii) the amount of Available Funds with respect to such
Determination Date, which amount will be withdrawn from the
Reserve Account to the extent funds are on deposit therein and
deposited into the Collection Account on the related Payment Date.
If funds in the Reserve Account are reduced to zero, the
Certificateholders will bear the credit and other risks associated with
ownership of the Receivables. In such a case, the amount available for
distribution may be less than that described below, and the
Certificateholders may experience delays or suffer losses as a result,
among other things, of defaults or delinquencies by the Obligors or
previous extensions made by the Servicer.
[Pre-Funding Account; Subsequent Receivables]
[On the Closing Date, approximately $____________ of Initial
Receivables will be transferred to the Trust by the Seller and the
approximately $______________ Pre-Funded Amount will be deposited by the
Trust in the Pre-Funding Account. If the principal amount of eligible
Receivables originated by Paragon during the Funding Period is less than
the Pre-Funded Amount, the Seller will have insufficient Receivables to
sell to the Trust on the Subsequent Transfer Dates, thereby resulting in a
prepayment of principal to the Noteholders and the Certificateholders as
described in the following paragraph.] [In addition, any conveyance of
Subsequent Receivables is subject to the satisfaction, on or before the
related Subsequent Transfer Date, of the condition that each such
Subsequent Receivable satisfies the eligibility criteria specified in "The
Receivables Pool" herein and "The Receivables Pools" in the Prospectus.]
[To the extent that the Pre-Funded Amount has not been fully
applied to the purchase of Subsequent Receivables by the Trust during the
Funding Period, the Noteholders and the Certificateholders will receive, on
the Payment Date on or immediately following the last day of the Funding
Period, a prepayment of principal in an amount equal to their pro rata
share (based on the Certificate Balance) of any remaining Pre-Funded Amount
following the purchase of any Subsequent Receivables on such Payment Date.
It is anticipated that the principal amount of Subsequent Receivables sold
to the Trust will not be exactly equal to the original Pre-Funded Amount
and that therefore there will be at least a nominal amount of principal
prepaid to the Noteholders and to the Certificateholders.]
[If the amount of the Pre-Funding Account will exceed 25% of the
aggregate proceeds from the offering, include the specific investments in
which the Pre-Funding Account will be invested and specify that the actual
investments of the Pre-Funding Account as of the end of the preceding month
will be provided in the periodic reports on Form 8-K and Form 10-K to be
filed by the Seller with respect to the Trust.]
Servicing Compensation and Payment of Expenses
The Servicing Fee Rate will be 1.0% per annum of the Aggregate
Principal Balance as of the opening of business on the first day of the
related Collection Period. See "Description of the Transfer and Servicing
Agreements--Servicing Compensation and Payment of Expenses" in the
Prospectus. The Servicer will also collect and retain any late fees,
non-sufficient funds fees, liquidation fees and other administrative fees
(the "Supplemental Servicing Fee") with respect to the Receivables.
Payments by or on behalf of Obligors will be allocated to scheduled
payments and late fees and other charges in accordance with the Servicer's
normal practices and procedures. As additional compensation, the Servicer
may be entitled to receive for the related Collection Period some or all of
the
S-22
<PAGE>
portion, if any, of the Payment Amount for such Collection Period remaining
after payment of the Servicing Fee and interest and principal in respect of
the Certificates and any required deposit to the Reserve Account. See
"Description of the Transfer and Servicing Agreements -- Servicing
Compensation and Payment of Expenses" in the Prospectus and
"--Distributions" herein.
Distributions
Deposits to Collection Account. On or before the eighth calendar
day of each month, or if such eighth day is not a Business Day, the next
Business Day (the "Determination Date"), the Servicer will provide the
Trustee with a report (the "Servicer's Report") containing certain
information with respect to the preceding Collection Period, including the
amount of aggregate collections on the Receivables during such Collection
Period, the aggregate amount of Receivables which became Defaulted
Receivables during such Collection Period, the aggregate Purchase Amounts
of Receivables to be repurchased by the Seller or to be purchased by the
Servicer on the related Deposit Date and the aggregate amount to be
withdrawn from the Reserve Account.
On or before each Deposit Date, (a) the Servicer will cause all
collections and Liquidation Proceeds to be deposited into the Collection
Account and will deposit into the Collection Account all Purchase Amounts
of Receivables to be purchased by the Servicer on such Deposit Date, (b)
the Seller will deposit into the Collection Account all Purchase Amounts of
Receivables to be repurchased by the Seller on such Deposit Date and (c)
the Trustee will make any required withdrawals for the related Payment Date
from the Reserve Account and deposit such amounts into the Collection
Account.
Deposits to the Distribution Accounts. On each Payment Date, the
Trustee will make the following deposits and distributions from the
Collection Account, to the extent of the sum of Available Interest and any
amount available in the Reserve Account remaining after such reimbursements
(and, in the case of shortfalls occurring under clause (b) below in the
Class A Interest Payment Amount, the Class B Percentage of Available
Principal to the extent of such shortfalls), in the following priority:
(a) to the Servicer, any unpaid Servicing Fee for the related
Collection Period and all unpaid Servicing Fees from
prior Collection Periods;
(b) to the Class A Distribution Account, the Class A Interest
Payment Amount for such Payment Date; and
(c) to the Class B Distribution Account, the Class B Interest
Payment Amount for such Payment Date.
On each Payment Date based on the related Servicer's Report, the
Trustee will make the following deposits and distributions, to the extent
of Available Principal and the portions of Available Interest and amount
available in the Reserve Amount remaining after the application of clauses
(a), (b) and (c) above, in the following priority:
(d) to the Class A Distribution Account, the Class A Principal
Payment Amount for such Payment Date;
(e) to the Class B Distribution Account, the Class B Principal
Payment Amount for such Payment Date;
(f) to the Reserve Account, any amounts remaining, until the
amount on deposit in the Reserve Account equals the
Reserve Account Required Amount; and
(g) to the Seller or the Servicer, as an additional servicing, any
amounts remaining.
S-23
<PAGE>
On each Payment Date, all amounts on deposit in the Class A
Distribution Account will be distributed to the Class A Certificateholders
as of the Record Date and all amounts on deposit in the Class B
Distribution Account will be distributed to the Class B Certificateholders
as of the Record Date by the Trustee.
"Class A Interest Carryover Shortfall" means, (a) with
respect to the initial Payment Date, zero, and (b) with respect to
any other Payment Date, the excess of Class A Monthly Interest for
the preceding Payment Date and any outstanding Class A Interest
Carryover Shortfall on such preceding Payment Date, over the
amount in respect of interest that is actually deposited in the
Class A Distribution Account on such preceding Payment Date, plus
30 days of interest on such excess, to the extent permitted by
law, at the Class A Certificate Rate.
"Class A Interest Payment Amount" means, with respect to
any Payment Date, the sum of Class A Monthly Interest for such
Payment Date and the Class A Interest Carryover Shortfall for such
Payment Date.
"Class A Monthly Interest" means, with respect to any
Payment Date, one-twelfth of the Class A Certificate Rate
multiplied by the Class A Certificate Balance as of the Payment
Date occurring in the preceding Collection Period (after giving
effect to any payments made on such Payment Date) or, in the case
of the first Payment Date, as of the Closing Date.
"Class A Monthly Principal" means, with respect to any
Payment Date, the Class A Percentage of the Principal Distribution
Amount for such Payment Date.
"Class A Principal Carryover Shortfall" means, as of the
close of business on any Payment Date, the excess of Class A
Monthly Principal for such Payment Date and any outstanding Class
A Principal Carryover Shortfall from the preceding Payment Date
over the amount in respect of principal that is actually deposited
in the Class A Distribution Account on such Payment Date.
"Class A Principal Payment Amount" means, with respect to
any Payment Date, the sum of Class A Monthly Principal for such
Payment Date and, in the case of any Payment Date other than the
initial Payment Date, the Class A Principal Carryover Shortfall as
of the close of business on the preceding Payment Date; provided,
however, that the Class A Principal Payment Amount shall not
exceed the outstanding aggregate principal balance of the Class A
Certificates prior to such Payment Date. In addition, on the Final
Scheduled Payment Date, the Class A Principal Payment Amount shall
include any additional amount available to reduce the outstanding
aggregate principal balance of the Class A Certificates to zero.
"Class B Interest Carryover Shortfall" means, (a) with
respect to the initial Payment Date, zero, and (b) with respect to
any other Payment Date, the excess of Class B Monthly Interest for
the preceding Payment Date and any outstanding Class B Interest
Carryover Shortfall on such preceding Payment Date, over the
amount in respect of interest that is actually deposited in the
Class B Distribution Account on such preceding Payment Date, plus
30 days of interest on such excess, to the extent permitted by
law, at the Class B Certificate Rate.
"Class B Interest Payment Amount" means, with respect to
any Payment Date, the sum of Class B Monthly Interest for such
Payment Date and the Class B Interest Carryover Shortfall for such
Payment Date.
"Class B Monthly Interest" means, with respect to any
Payment Date, one-twelfth of the Class B Certificate Rate
multiplied by the Class B Certificate Balance as of the Payment
Date occurring in the preceding Collection Period (after giving
effect to any payments made on such Payment Date) or, in the case
of the first Payment Date, as of the Closing Date.
S-24
<PAGE>
"Class B Monthly Principal" means, with respect to any
Payment Date, the Class B Percentage of the Principal Distribution
Amount for such Payment Date.
"Class B Principal Carryover Shortfall" means, as of the
close of business on any Payment Date, the excess of Class B
Monthly Principal for such Payment Date and any outstanding Class
B Principal Carryover Shortfall from the preceding Payment Date
over the amount in respect of principal that is actually deposited
in the Class B Distribution Account on such Payment Date.
"Class B Principal Payment Amount" means, with respect to
any Payment Date, the sum of Class B Monthly Principal for such
Payment Date and, in the case of any Payment Date other than the
initial Payment Date, the Class B Principal Carryover Shortfall as
of the close of business on the preceding Payment Date; provided,
however, that the Class B Interest Payment Amount shall not exceed
the outstanding aggregate principal balance of the Class B
Certificates prior to such Payment Date. In addition, on the Final
Scheduled Payment Date, the Class B Interest Payment Amount will
include any additional amount available to reduce the outstanding
aggregate principal balance of the Class B Certificates to zero.
The following chart sets forth an example of the application of
the foregoing provisions to a hypothetical monthly distribution:
March 1 - March 31............. Collection Period. The Servicer receives
monthly payments, prepayments, and other
proceeds in respect of the Receivables.
March 31....................... Record Date. Distributions on the next
Payment Date are made to Certificateholders
of record at the close of business on this
date.
April 8........................ Determination Date. On or before this
date, the Servicer delivers to the
Trustee the Servicer's Report, which
notifies the Trustee of the amounts
required to be distributed and the
amounts available for distribution on the
next Payment Date.
April 12....................... Deposit Date. All Collections relating to
the preceding Collection Period are
required to be deposited in the
Collection Account on or before this
date. The Trustee withdraws funds from
the Reserve Account to the extent
necessary.
April 15....................... Payment Date. The Trustee distributes to
Certificateholders amounts payable in
respect of the Certificates, pays the
Servicing Fee to the Servicer, deposits
any excess funds to the Reserve Account
and, if the Reserve Account is equal to
the Reserve Account Required Amount, pays
any remaining funds to the Seller.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
Information regarding certain legal aspects of the Receivables is
set forth under "Certain Legal Aspects of the Receivables" in the
Prospectus.
S-25
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material federal income tax
consequences of the purchase, ownership and disposition of the Certificates
and such summary represents the opinion of Federal Tax Counsel subject to
the qualifications set forth herein. An opinion of Federal Tax Counsel,
however, is not binding on the IRS or the courts. No ruling on any of the
issues discussed below will be sought from the Internal Revenue Service
("IRS"). The following summary is intended as a discussion of the possible
effects of certain federal income tax consequences to holders, but does not
purport to furnish information in the level of detail or with the attention
to a holder's specific tax circumstances that would be provided by a
holder's own tax advisor. For example, it does not discuss the tax
consequences of the purchase, ownership and disposition of Certificates by
Certificateholders that are subject to special treatment under the federal
income tax laws (including banks and thrifts, insurance companies,
regulated investment companies, dealers in securities, foreign investors,
trusts and estates and pass-through entities, the equity holders of which
are any of the foregoing). Moreover, there are no cases or IRS rulings on
similar transactions involving interests issued by a trust with terms
similar to those of the Certificates. As a result, the IRS may disagree
with all or a part of the discussion below. We suggest that prospective
investors consult their own tax advisors in determining the federal, state,
local, foreign and any other tax consequences to them of the purchase,
ownership and disposition of the Certificates.
The following summary is based upon current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the Treasury
regulations promulgated thereunder and judicial or ruling authority, all of
which are subject to change, which change may be retroactive.
Scope of the Tax Opinions
In the opinion of Federal Tax Counsel, the Trust will not be
classified as an association (or publicly traded partnership) taxable as a
corporation and that such Trust will be classified as a grantor trust under
subpart E, Part I of subchapter J of the Code for federal income tax
purposes.
In addition, Federal Tax Counsel has prepared or reviewed the
statements herein and in the Prospectus under the heading "Summary of
Terms--Material Federal Income Tax Consequences" as they relate to federal
income tax matters and under the heading "Material Federal Income Tax
Consequences," and is of the opinion that such statements are a fair and
accurate discussion of all material federal income tax consequences of the
purchase, ownership and disposition of the Certificates. Such statements
are intended as a discussion of the possible effects of the classification
of the Trust as a grantor trust for federal income tax purposes on
investors and of related tax matters affecting investors generally, but do
not purport to furnish information in the level of detail or with the
attention to the investor's specific tax circumstances that would be
provided by an investor's own tax adviser. Accordingly, we suggest that
investors consult their own tax advisers with regard to the tax
consequences of investing in the Certificates.
Tax Classification of the Trust as a Grantor Trust
Federal Tax Counsel is of the opinion that the Trust will not be
classified as an association taxable as a corporation and that such Trust
will be classified as a grantor trust under subpart E, Part 1 of subchapter
J of the Code. A copy of such opinion of Federal Tax Counsel will be filed
with the Commission as an exhibit to a Form 8-K prior to the confirmation
of sales of any series of Securities. Owners of Certificates (referred to
herein as "Grantor Trust Certificateholders") will be treated for federal
income tax purposes as owners of a portion of the Trust's assets as
described below. The Certificates issued by the Trust are referred to
herein as "Grantor Trust Certificates".
Possible Alternative Treatment of the Trust as a Grantor Trust. In
a recently released technical advice memorandum, the IRS recharacterized
two high quality auto loan grantor trust securitizations as secured
borrowings for federal income tax purposes. Although Federal Tax Counsel is
of the opinion that the Trust will be classified as a grantor trust for
federal income tax purposes, the IRS could disagree with such opinion and
assert that the Seller's assignment to the Trust followed by the issuance
of Certificates by the Trust should be recharacterized as
S-26
<PAGE>
a secured borrowing by the Seller rather than as a sale for federal income
tax purposes. Even if the IRS were successful in recharacterizing the
Seller's assignment to the Trust in this matter, such recharacterization
would not be anticipated to have a material adverse effect on the timing or
character of income to the Trust or Certificateholders.
Characterization. Based on Federal Tax Counsel's conclusion that
the Trust will not be classified as an association or a publicly traded
partnership taxable as an association and that such Trust will be
classified as a grantor trust under subpart E, Part I of subchapter J of
the Code for federal income tax purposes, each Grantor Trust
Certificateholder will be treated as the owner of a pro rata undivided
interest in the interest and principal portions of the Trust represented by
the Grantor Trust Certificates and will be considered the equitable owner
of a pro rata undivided interest in each of the Receivables in the Trust.
Any amounts received by a Grantor Trust Certificateholder in lieu of
amounts due with respect to any Receivable because of a default or
delinquency in payment will be treated for federal income tax purposes as
having the same character as the payments they replace.
Each Grantor Trust Certificateholder will be required to report on
its federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire
income from the Receivables in the Trust represented by the Grantor Trust
Certificates, including interest, OID, if any, market discount, if any,
prepayment fees, assumption fees, any gain recognized upon an assumption
and late payment charges received by the Servicer. Under Sections 162 or
212 of the Code each Grantor Trust Certificateholder will be entitled to
deduct its pro rata share of servicing fees, prepayment fees, assumption
fees, any loss recognized upon an assumption and late payment charges
retained by the Servicer, provided that such amounts are reasonable
compensation for services rendered to the Trust. Grantor Trust
Certificateholders that are individuals, estates or trusts will be entitled
to deduct their share of expenses only to the extent such expenses plus all
other miscellaneous itemized deductions exceed two percent of its adjusted
gross income. In addition, the Code provides that the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds a threshold amount specified in the Code
adjusted for inflation ($124,500 in 1998, in the case of a joint return)
will be reduced by the lesser of (i) 3% of the excess of adjusted gross
income over the specified threshold amount or (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year. A Grantor
Trust Certificateholder using the cash method of accounting must take into
account its pro rata share of income and deductions as and when collected
by or paid to the Servicer. A Grantor Trust Certificateholder using an
accrual method of accounting must take into account its pro rata share of
income and deductions as they become due or are paid to the Servicer,
whichever is earlier. If the servicing fees paid to the Servicer are deemed
to exceed reasonable servicing compensation, the amount of such excess
could be considered as an ownership interest retained by the Servicer (or
any person to whom the Servicer assigned for value all or a portion of the
servicing fees) in a portion of the interest payments on the Receivables.
The Receivables would then be subject to the "coupon stripping" rules of
the Code discussed below.
Premium. The price paid for a Grantor Trust Certificate by a
holder will be allocated to such holder's undivided interest in each
Receivable based on each Receivable's relative fair market value, so that
such holder's undivided interest in each Receivable will have its own tax
basis. A Grantor Trust Certificateholder that acquires an interest in
Receivables at a premium may elect to amortize such premium under a
constant yield method. Amortizable bond premium will be treated as an
offset to interest income on such Grantor Trust Certificate. The basis for
such Grantor Trust Certificate will be reduced to the extent that
amortizable premium is applied to offset interest payments. A Grantor Trust
Certificateholder that makes this election for a Grantor Trust Certificate
that is acquired at a premium will be deemed to have made an election to
amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Grantor Trust Certificateholder held at
the beginning of the year of the election or acquired thereafter. Absent
such an election, the premium will be deductible as an ordinary loss only
upon disposition of the Certificate or pro rata as principal is paid on the
Receivables.
S-27
<PAGE>
Stripped Bonds and Stripped Coupons
To the extent a transaction is determined to involve "excess
servicing" (as described above), or that the classes of Certificates
represent stripped interests in the underlying Receivables, the Grantor
Trust Certificates will represent interests in stripped bonds for federal
income tax purposes. Although the tax treatment of stripped bonds is not
entirely clear, based on recent guidance by the IRS, each purchaser of a
Grantor Trust Certificate will be treated as the purchaser of a stripped
bond which should generally be treated as a single debt instrument issued
on the day it is purchased for purposes of calculating any OID. Under
Treasury regulations (the "Section 1286 Treasury Regulations"), if the
discount on a stripped bond is larger than a de minimis amount (as
calculated for purposes of the OID rules of the Code) such stripped bond
will be considered to have been issued with OID. If OID rules were to
apply, all of the taxable income to be recognized with respect to the
Certificates would be includible in income as OID but would not be
includible again when the interest is actually received. Regulations do not
adequately address the circumstances in which payment of interest on
Certificates such as the Grantor Trust Certificates would be considered
unconditionally payable, and thus, Federal Tax Counsel is unable to opine
as to the extent to which interest payments on the Certificates would be
treated as qualified stated interest.
Market Discount and Premium. A Grantor Trust Certificateholder
that acquires an undivided interest in Receivables may be subject to the
market discount rules of Code Sections 1276 through 1278 to the extent an
undivided interest in a Receivable is considered to have been purchased at
a "market discount." Generally, the amount of market discount is equal to
the excess of the portion of the principal amount of such Receivable
allocable to such holder's undivided interest over such holder's tax basis
in such interest. Market discount with respect to a Grantor Trust
Certificate will be considered to be zero if the amount allocable to the
Grantor Trust Certificate is less than 0.25% of the Grantor Trust
Certificate's stated redemption price at maturity multiplied by the
weighted average maturity remaining after the date of purchase. Treasury
regulations implementing the market discount rules have not yet been
issued; therefore, we suggest that investors consult their own tax advisors
regarding the application of these rules and the advisability of making any
of the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount
bond shall be treated as ordinary income to the extent that it does not
exceed the accrued market discount at the time of such payment. The amount
of accrued market discount for purposes of determining the tax treatment of
subsequent principal payments or dispositions of the market discount bond
is to be reduced by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue
regulations providing for the computation of accrued market discount on
debt instruments, the principal of which is payable in more than one
installment. While the Treasury Department has not yet issued regulations,
rules described in the relevant legislative history likely will apply.
Under those rules, the holder of a market discount bond may elect to accrue
market discount on the basis of a constant yield method.
A holder who acquired a Grantor Trust Certificate at a market
discount may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry such Grantor Trust Certificate purchased with market
discount. For these purposes, the de minimis rule referred to above
applies. Any such deferred interest expense would not exceed the market
discount that accrues during such taxable year and is, in general, allowed
as a deduction not later than the year in which such market discount is
includible in income. If such holder elects to include market discount in
income currently as it accrues on all market discount instruments acquired
by such holder in that taxable year or thereafter, the interest deferral
rule described above will not apply.
To the extent a Grantor Trust Certificateholder is considered to
have purchased an undivided interest in a Receivable for an amount that is
greater than its stated redemption price at maturity of such Receivable,
such Grantor Trust Certificateholder will be considered to have purchased
the Receivable with "amortizable bond premium" equal in amount to such
excess. See "--Premium."
S-28
<PAGE>
Election to Treat All Interest as OID. The OID regulations permit
a Grantor Trust Certificateholder to elect to accrue all interest, discount
(including de minimis market or OID) and premium in income as interest,
based on a constant yield method. If such an election were to be made with
respect to a Grantor Trust Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that such Grantor Trust Certificateholder acquires
during the year of the election or thereafter. Similarly, a Grantor Trust
Certificateholder that makes this election for a Grantor Trust Certificate
that is acquired at a premium will be deemed to have made an election to
amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Grantor Trust Certificateholder held at
the beginning of the year of the election or acquired thereafter. See
"--Premium." The election to accrue interest, discount and premium on a
constant yield method with respect to a Grantor Trust Certificate is
generally irrevocable.
Sale or Exchange of a Grantor Trust Certificate. Sale or exchange
of a Grantor Trust Certificate prior to its maturity will result in gain or
loss equal to the difference, if any, between the amount received and the
owner's adjusted basis in the Grantor Trust Certificate. Such adjusted
basis generally will equal the seller's purchase price for the Grantor
Trust Certificate, increased by the OID included in the seller's gross
income with respect to the Grantor Trust Certificate, and reduced by
principal payments on the Grantor Trust Certificate previously received by
the seller. Such gain or loss will be capital gain or loss to an owner for
which a Grantor Trust Certificate is a "capital asset" within the meaning
of Code Section 1221, and will be long-term or short-term depending on
whether the Grantor Trust Certificate has been owned for the long-term
capital gain holding period. For individuals, estates and trusts, the
current maximum long-term capital gain rate is generally 20% if the capital
asset has been held for more than 12 months.
Grantor Trust Certificates will be "evidences of indebtedness"
within the meaning of Code Section 582(c)(1), so that gain or loss
recognized from the sale of a Grantor Trust Certificate by a bank or a
thrift institution to which such section applies will be treated as
ordinary income or loss.
Non-U.S. Persons. Generally, interest or OID paid by the person
required to withhold tax under Code Section 1441 or 1442 to (i) an owner
that is not a U.S. Person (as defined below) or (ii) a Grantor Trust
Certificateholder holding on behalf of an owner that is not a U.S. Person
would not be subject to withholding if such Grantor Trust Certificateholder
complies with certain identification requirements (including delivery of a
statement, signed by the Grantor Trust Certificateholder under penalties of
perjury, certifying that such Grantor Trust Certificateholder is not a U.S.
Person and providing the name and address of such Grantor Trust
Certificateholder).
As used herein, a "U.S. Person" means a citizen or resident of the
United States, a corporation or a partnership organized in or under the
laws of the United States or any political subdivision thereof or an estate
or trust, the income of which is includible in gross income for federal
income tax purposes regardless of its source.
On October 6, 1997, final Treasury regulations (the "Withholding
Tax Regulations") were issued that modify certain of the filing
requirements with which foreign persons must comply in order to be entitled
to an exemption from U.S. withholding tax or a reduction to the applicable
U.S. withholding tax rate. Those persons currently required to file Form
W-8 generally will continue to be required to file that form. However, the
requirement that foreign persons submit Form W-8 is extended to most
foreign persons who wish to seek an exemption from withholding tax on the
basis that income from the Certificates is effectively connected with the
conduct of a U.S. trade or business (in lieu of Form 4224) and to foreign
persons wishing to rely on a tax treaty to reduce the withholding tax rate
(in lieu of Form 1001). The Withholding Tax Regulations are effective for
payments of interest due after December 31, 1999, but Forms 4224 and 1001
filed prior to that date will continue to be effective until the earlier of
December 31, 2000 or the current expiration date of those forms. We suggest
that prospective investors consult their own tax advisors with respect to
the effect of the Withholding Tax Regulations.
S-29
<PAGE>
Information Reporting and Backup Withholding. The Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a Grantor Trust Certificateholder at
any time during such year, such information as may be deemed necessary or
desirable to assist Grantor Trust Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold
Grantor Trust Certificates as nominees on behalf of beneficial owners. If a
holder, beneficial owner, financial intermediary or other recipient of a
payment on behalf of a beneficial owner fails to supply a certified
taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend
income required to be shown on its federal income tax return, 31% backup
withholding may be required with respect to any payments. Any amounts
deducted and withheld from a distribution to a recipient would be allowed
as a credit against such recipient's federal income tax liability. We
suggest that prospective investors consult their own tax advisors
concerning the potential impact of the Withholding Tax Regulations.
STATE INCOME TAX CONSEQUENCES
In addition to the federal income tax consequences
described in "Material Federal Income Tax Consequences" above, potential
purchasers should consider the state income tax consequences of the
acquisition, ownership and disposition of the Certificates. State income
tax law may vary substantially from state to state, and this discussion
does not purport to describe any aspect of the income tax laws of any
state. Therefore, we suggest that potential purchasers consult their own
tax advisors with respect to the various tax consequences of an investment
in the Certificates.
ERISA CONSIDERATIONS
The Class A Certificates
Subject to the considerations set forth under "ERISA
Considerations--Trusts That Do Not Issue Notes" in the Prospectus, the
Class A Certificates may be purchased with the assets of an employee
benefit plan or an individual retirement account (a "Plan") subject to
ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended (the
"Code"). A fiduciary of a Plan must determine that the purchase of a Class
A Certificate is consistent with its fiduciary duties under ERISA and does
not result in a nonexempt prohibited transaction as defined in Section 406
of ERISA or Section 4975 of the Code. For additional information regarding
treatment of the Class A Certificates under ERISA, see "ERISA
Considerations" in the Prospectus.
The Class B Certificates
The Class B Certificates and any beneficial interest in such Class
B Certificates may not be acquired (a) with the assets of an employee
benefit plan (as defined in Section 3(3) of ERISA) that is subject to the
provisions of Title I of ERISA, (b) by a plan described in Section
4975(e)(1) of the Code or (c) by any entity whose underlying assets include
plan assets by reason of a plan's investment in the entity. By its
acceptance of a Class B Certificate, each Class B Certificateholder will be
deemed to have represented and warranted that it is not subject to the
foregoing limitation. For additional information regarding treatment of the
Class B Certificates under ERISA, see "ERISA Considerations" in the
Prospectus.
S-30
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement, the Seller has agreed to cause the Trust to sell to each of the
underwriters listed below (each, an "Underwriter"), and each of the
Underwriters has agreed to purchase, the principal amount of the
Certificates set forth opposite its name below. Under the terms and
conditions of the Underwriting Agreement, each of the Underwriters is
obligated to take and pay for all of the Certificates, if any are taken.
Principal Amount of Principal Amount of
Class A Certificates Class B Certificates
- ----------------......... $--------------------- $------------------------
- ----------------......... --------------------- ------------------------
- ----------------......... --------------------- ------------------------
Total $_____________________ $________________________
The Seller has been advised by the Underwriters that they propose
initially to offer the Certificates to the public at the prices set forth
herein, and to certain dealers at such prices less the initial concession
not in excess of _____% per Class A Certificate and ____% per Class B
Certificate. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of ____% per Class A Certificate and ____% per
Class B Certificate to certain other dealers. After the initial public
offering of the Certificates, the public offering prices and such
concessions may be changed.
The Seller does not intend to apply for listing of the
Certificates on a national securities exchange, but has been advised by the
Underwriters that they intend to make a market in the Certificates. The
Underwriters are not obligated, however, to make a market in the
Certificates and may discontinue market making at any time without notice.
No assurance can be given as to the liquidity of the trading market for the
Certificates.
The Seller and Paragon have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended.
In the ordinary course of their respective businesses, each
Underwriter and its affiliates have engaged and may in the future engage in
commercial banking and investment banking transactions with the Seller.
LEGAL OPINIONS
In addition to the legal opinions described in the Prospectus,
certain federal income tax and other legal matters will be passed upon for
the Trust by Mayer, Brown & Platt, Chicago, Illinois. Certain legal matters
will be passed upon for the Underwriters by _____________________,
______________, ____________. Mayer, Brown & Platt may from time to time
render legal services to the Seller, the Servicer and its affiliates.
S-31
<PAGE>
INDEX OF DEFINED TERMS
|| Page
Aggregate Principal Balance..............................................S-4
Agreement................................................................S-3
Amount Financed..........................................................S-4
Available Principal.....................................................S-20
Bank.....................................................................S-3
Business Day.............................................................S-5
Certificate Rate.........................................................S-5
Certificateholders.......................................................S-5
Certificates.............................................................S-1
Class A Certificate Balance..............................................S-6
Class A Certificate Rate.................................................S-5
Class A Certificateholders...............................................S-5
Class A Certificates.....................................................S-1
Class A Distribution Account............................................S-21
Class A Interest Carryover Shortfall....................................S-24
Class A Interest Payment Amount.........................................S-24
Class A Monthly Interest................................................S-24
Class A Monthly Principal...............................................S-24
Class A Percentage.......................................................S-4
Class A Principal Carryover Shortfall...................................S-24
Class A Principal Payment Amount........................................S-24
Class B Certificate Balance..............................................S-6
Class B Certificate Rate.................................................S-5
Class B Certificateholders...............................................S-5
Class B Certificates.....................................................S-1
Class B Distribution Account............................................S-21
Class B Interest Carryover Shortfall....................................S-24
Class B Interest Payment Amount.........................................S-24
Class B Monthly Interest................................................S-25
Class B Monthly Principal...............................................S-25
Class B Percentage.......................................................S-4
Class B Principal Carryover Shortfall...................................S-25
Class B Principal Payment Amount........................................S-25
Closing Date.............................................................S-4
Code....................................................................S-30
Collection Period .......................................................S-5
Commission...............................................................S-2
CTS.....................................................................S-19
Cutoff Date..............................................................S-3
Defaulted Receivable....................................................S-20
Deficiency Claim Amount.................................................S-22
Deposit Date.............................................................S-7
Determination Date......................................................S-23
ERISA....................................................................S-8
Federal Tax Counsel.....................................................S-26
Final Scheduled Maturity Date............................................S-4
Financed Vehicles........................................................S-3
Floor Amount............................................................S-22
S-32
<PAGE>
Grantor Trust Certificateholders........................................S-26
Grantor Trust Certificates..............................................S-26
Initial Principal Balance................................................S-6
Issuer...................................................................S-3
Liquidation Proceeds....................................................S-21
Payment Date.............................................................S-5
Plan....................................................................S-30
Principal Balance .......................................................S-4
Principal Distribution Amount...........................................S-20
Prospectus...............................................................S-1
Purchased Receivable....................................................S-20
Rating Agencies..........................................................S-8
Realized Losses.........................................................S-20
Receivables Pool........................................................S-11
Record Date..............................................................S-5
Reserve Account..........................................................S-7
Reserve Account Initial Deposit..........................................S-7
Reserve Account Required Amount.........................................S-21
Section 1286 Treasury Regulations.......................................S-28
Seller...................................................................S-1
Servicer.................................................................S-1
Servicer's Report ......................................................S-23
Supplemental Servicing Fee..............................................S-23
Triumph.................................................................S-19
Trust....................................................................S-1
Trustee..................................................................S-3
U.S. Person.............................................................S-29
Underwriter.............................................................S-31
||
S-33
<PAGE>
===========================================================
No dealer, salesman or other person has been authorized to
give any information or to make any representation not
contained in this Prospectus Supplement or the Prospectus
and, if given or made, such information or representation
must not be relied upon as having been authorized by the
Seller or the Underwriters. This Prospectus Supplement and
the Prospectus do not constitute an offer of any securities
other than those to which they relate or an offer to sell, or a
solicitation of an offer to buy, to any person in any
jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus Supplement
and the Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that the
information contained herein is correct as of any time
subsequent to their respective dates.
---------------------------
TABLE OF CONTENTS
Prospectus Supplement
Page
Reports to Certificateholders................. S-2
Summary of Terms.............................. S-4
Risk Factors.................................. S-9
The Trust..................................... S-10
The Receivables Pool.......................... S-11
The Seller, the Servicer and Paragon.......... S-17
Weighted Average Life of the Certificates..... S-20
Description of the Certificates............... S-20
Certain Legal Aspects of the Receivables...... S-26
Material Federal Income Tax Consequences...... S-27
State Income Tax Consequences................. S-31
ERISA Considerations.......................... S-31
Underwriting.................................. S-32
Legal Opinions................................ S-32
Index of Defined Terms........................ S-33
Prospectus
Page
Available Information.........................
Incorporation of Certain Documents
by Reference................................
Summary of Terms..............................
Risk Factors..................................
The Trusts....................................
The Receivables Pools.........................
Weighted Average Life of the Securities.......
Pool Factors and Trading Information..........
Use of Proceeds...............................
The Seller....................................
Paragon.......................................
Description of the Notes......................
Description of the Certificates...............
Certain Information Regarding the
Securities..................................
Description of the Transfer and Servicing
Agreements
Certain Legal Aspects of the Receivables......
Material Federal Income Tax Consequences......
Certain State Tax Consequences................
ERISA Considerations..........................
Plan of Distribution..........................
Legal Opinions................................
Index of Defined Terms........................
Global Clearance, Settlement and Tax
Documentation Procedures....................
===========================================================
<PAGE>
========================================
$________________________
PARAGON AUTO RECEIVABLES
CORPORATION
(Seller)
$____________
__% Asset Backed
Certificates
Class A
$______________
__% Asset Backed
Certificates
Class B
===========
PROSPECTUS SUPPLEMENT
_________. _____
============
========================================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED __________, ____
[PRELIMINARY OWNER TRUST PROSPECTUS SUPPLEMENT FORM]
(To Prospectus dated __________, ____)
$________________
PARAGON AUTO RECEIVABLES OWNER TRUST ____-_
Issuer
$______________ Class A-1 ____% Asset Backed Notes
$______________ Class A-2 ____% Asset Backed Notes
[$______________ ____% Asset Backed Certificates]
PARAGON AUTO RECEIVABLES CORPORATION
Seller
PARAGON ACCEPTANCE CORPORATION
Servicer
The Paragon Auto Receivables Owner Trust ____-__ (the "Trust")
will be governed by a Trust Agreement, to be dated as of
___________________, ____, between Paragon Auto Receivables Corporation, as
seller (the "Seller") and ___________________, as Owner Trustee. The Trust
will issue $_____________ aggregate principal amount of Class A-1 ___%
Asset Backed Notes (the "Class A-1 Notes") and $____________ aggregate
principal amount of Class A-2 ___% Asset Backed Notes (the "Class A-2
Notes" and, together with the Class A-1 Notes, the "Notes") pursuant to an
Indenture, to be dated as of _____________, ____, between the Trust and
___________________, as Indenture Trustee. The Trust will also issue
$__________________ aggregate principal amount of ___% Asset Backed
Certificates (the "Certificates" and, together with the Notes, the
"Securities"), [which are not being offered hereby]. The rights of the
Certificateholders will be subordinated to the rights of the Noteholders to
the extent described herein. The assets of the Trust will include a pool of
motor vehicle retail installment contracts (the "Receivables") secured by
new or used automobiles, light duty trucks and sports utility vehicles, all
monies due or received thereunder or with respect thereto after _________,
_____, security interests in the vehicles financed thereby, any proceeds
from claims on insurance policies with respect to the financed vehicles,
certain rights under dealer agreements and certain other agreements, rights
with respect to deposit accounts in which collections are held [and monies
on deposit in a trust account (the "Pre-Funding Account") to be established
with the Indenture Trustee], and the proceeds of the foregoing. [Additional
Receivables (the "Subsequent Receivables") will be purchased by the Trust
from the Seller from time to time on or before __________, _____ from funds
on deposit in the Pre-Funding Account.] (cover continued on next page)
_____________________
Prospective investors should consider the material risks involved with an
investment in the [Notes], [Securities] described in "Risk Factors" set
forth at page S-__ herein and at page ___ in the accompanying Prospectus
(the "Prospectus"). [Material risks associated with the Subsequent
Receivables are described at page __ of the accompanying Prospectus.]
THE NOTES REPRESENT [NOTES] OF, AND THE CERTIFICATES REPRESENT BENEFICIAL
INTERESTS IN, [THE TRUST ONLY AND DO NOT REPRESENT] OBLIGATIONS OF OR
INTERESTS IN PARAGON AUTO RECEIVABLES CORPORATION, PARAGON ACCEPTANCE
CORPORATION OR ANY OF THEIR AFFILIATES. NEITHER THE [SECURITIES] [NOTES]
NOR THE RECEIVABLES ARE INSURED OR GUARANTEED BY PARAGON AUTO RECEIVABLES
CORPORATION, PARAGON ACCEPTANCE CORPORATION OR ANY OF THEIR AFFILIATES.
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Underwriting
Price to Discounts and Proceeds to
Public(1) Commissions the Seller(1)(2)
Per Class A-1 Note % % %
Per Class A-2 Note % % %
[Per Certificate % % %]
Total $____________ $____________ $____________
_________________
(1) Plus accrued interest, if any, from ___________, _____.
(2) Before deducting expenses, estimated to be $___________.
_______________________
The Notes [and Certificates] are offered by the Underwriters when, as and
if issued and accepted by the Underwriters and subject to their right to
reject orders in whole or in part. It is expected that delivery of the
Notes [and the Certificates] will be made in book-entry form only through
the Same Day Funds Settlement System of The Depository Trust Company, [or
through Cedel Bank, societe anonyme or the Euroclear System,] on or about
__________, _____.
<PAGE>
The assets of the Trust will be transferred by the Seller to the
Trust on or prior to the Closing Date. The Notes will be secured by the
assets of the Trust pursuant to the Indenture. Capitalized terms used in
this Prospectus Supplement are defined in this Prospectus Supplement on the
pages indicated in the "Index of Terms" on page ___ of this Prospectus
Supplement or, to the extent not defined herein, are defined in the
Prospectus. Interest on all classes of Notes will accrue at the fixed per
annum interest rates specified above. Interest on the Notes will be payable
on the [15th] day of each month or the next business day (each, a "Payment
Date"), commencing _______, ____. Principal of the Notes will be payable on
each Payment Date to the extent described herein[, except that no principal
will be paid on the Class A-2 Notes until the Class A-1 Notes have been
paid in full]. See "Description of the Notes--Payments of Interest."
[The Certificates will represent fractional undivided interests in
the Trust. Interest, at the Certificate Rate, will be distributed to the
Certificateholders on each Payment Date to the extent of available funds.
Principal, to the extent described herein, will be distributed to the
Certificateholders on each Payment Date commencing with the Payment Date on
which the Notes were paid in full to the extent of available funds. See
"Description of the Certificates--Distributions of Principal Payments." See
"Description of the Transfer and Servicing Agreements--Subordination of
Certificates."]
Each class of Notes [and Certificates] will be payable in full on
the applicable final scheduled Payment Date as set forth herein. However,
payment in full of a class of Notes [or of Certificates] could occur
earlier or later than such dates as described herein. See "Weighted Average
Life of the Securities." In addition, the Class A-2 Notes and the
Certificates will be subject to prepayment in whole, but not in part, on
any Payment Date on which Paragon Acceptance Corporation in its capacity as
servicer (in such capacity, the "Servicer") exercises its option to
purchase the Receivables. The Servicer may purchase the Receivables when
the aggregate principal balance of the Receivables has declined to 10% or
less of the initial aggregate principal balance of the Receivables
purchased by the Trust.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPETE INFORMATION
ABOUT THE OFFERING OF THE NOTES [AND THE CERTIFICATES]. ADDITIONAL
INFORMATION IS CONTAINED IN THE PROSPECTUS AND PROSPECTIVE INVESTORS ARE
URGED TO READ BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN FULL.
SALES OF THE NOTES [OR THE CERTIFICATES] MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
TO THE EXTENT ANY STATEMENTS IN THIS PROSPECTUS SUPPLEMENT MODIFY OR
SPECIFY ADDITIONAL INFORMATION WITH RESPECT TO STATEMENTS IN THE
PROSPECTUS, THE STATEMENTS IN THIS PROSPECTUS SUPPLEMENT SHALL CONTROL.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT
OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE
NOTES [AND THE CERTIFICATES] AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
S-2
<PAGE>
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE [NOTES] [SECURITIES] DESCRIBED IN
THIS PROSPECTUS SUPPLEMENT, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS WHEN ACTING AS UNDERWRITER
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
There is currently no secondary market for the [Notes] [Securities]
offered hereby. Each Underwriter expects, but is not obligated to make
a market in the Notes [and Certificates]. There can be no assurance
that a secondary market will develop or that it will provide [Note]
[Security] holders with liquidity of investment or that it will continue
for the life of the [Notes] [Securities] offered hereby.
REPORTS TO [NOTE] [SECURITY] HOLDERS
Unless and until Definitive Notes [or Definitive Certificates] are
issued, monthly and annual unaudited reports containing information
concerning the Receivables will be prepared by the Servicer and sent on
behalf of the Trust only to Cede & Co., as nominee of the Depository Trust
Company and registered holder of the Notes [and the Certificates]. If
Definitive Notes [or Definitive Certificates] are issued, these reports
will be sent on behalf of the Trust directly to each Noteholder [and each
Certificateholder] at its registered address on file with the Indenture
Trustee [or the Owner Trustee, as applicable]. See "Certain Information
Regarding the Securities--Book- Entry Registration" and "--Reports to
Securityholders" in the accompanying Prospectus. Such reports will not
constitute financial statements prepared in accordance with generally
accepted accounting principles. The Seller, as originator of the Trust,
will file with the Securities and Exchange Commission (the "Commission")
such periodic reports as are required under the Securities Exchange Act of
1934, as amended, and the rules and regulations of the Commission
thereunder. In addition, the Commission maintains a public access site on
the Internet through the World Wide Web at which site reports, information
statements and other information, including all electronic filings, may be
viewed. The Internet address of such World Wide Web site is
http://www.sec.gov.
S-3
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference
to the detailed information appearing elsewhere in this Prospectus
Supplement and in the Prospectus. Capitalized terms used and not defined in
this summary are defined elsewhere in this Prospectus Supplement on the
pages indicated in the "Index of Terms" beginning at page S-__ or, to the
extent not defined herein, are defined in the Prospectus.
Issuer..................... Paragon Auto Receivables Owner Trust ____-__
(the "Trust" or the "Issuer"), a trust
established pursuant to a trust agreement
(as amended and supplemented, the "Trust
Agreement"), dated as of ________________,
____, between the Seller and the Owner
Trustee.
Seller..................... Paragon Auto Receivables Corporation, a
Delaware corporation (the "Seller"). See
"The Seller."
Servicer................... Paragon Acceptance Corporation, a Delaware
corporation ("Paragon" or, in its capacity
as servicer, the "Servicer").
Indenture Trustee.......... ____________________, as trustee under the
Indenture (the "Indenture Trustee").
Owner Trustee.............. ____________________, as owner trustee under
the Trust Agreement (the "Owner Trustee").
The Notes.................. The Trust will issue Asset Backed Notes (the
"Notes"), pursuant to an Indenture, to be
dated as of _______________, ____ (as
amended and supplemented from time to
time, the "Indenture"), between the Issuer
and the Indenture Trustee, as follows: (a)
Class A-1 __% Asset Backed Notes (the
"Class A-1 Notes") in the aggregate
initial principal amount of
$______________; and (b) Class A-2 __%
Asset Backed Notes (the "Class A-2 Notes")
in the aggregate initial principal amount
of $____________.
The Notes will be secured by the assets of
the Trust pursuant to the Indenture.
The Certificates........... The Trust will issue __% Asset Backed
Certificates (the "Certificates" and,
together with the Notes, the "Securities")
with an aggregate initial Certificate
Balance of $________________. The
Certificates will represent fractional
undivided interests in the Trust and will
be issued pursuant to the Trust Agreement.
The Receivables............ On or prior to __________, ____ (the
"Closing Date"), the Trust will purchase
the Trust Property from the Seller
pursuant to a Sale and Servicing Agreement
to be dated as of ____________, ____ (as
amended and supplemented from time to
time, the "Sale and Servicing Agreement"),
between the Trust, the Seller and the
Servicer. The "Trust Property" will
include: (i) specified motor vehicle
S-4
<PAGE>
retail installment contracts (collectively,
the "Receivables") secured by new or used
automobiles, light duty trucks and sports
utility vehicles (the "Financed
Vehicles"); (ii) all monies received
thereunder after __________, _____ (the
"Cutoff Date"); (iii) security interests
in the Financed Vehicles securing the
Receivables; (iv) any proceeds from claims
on certain insurance policies, refunds for
costs of service policies or contracts,
refunds of unearned premiums with respect
to certain insurance policies and any
recourse to Dealers for any of the
foregoing; (v) certain rights under Dealer
Agreements; (vi) certain Eligible Accounts
in which collections are held; and (vii)
all income from and proceeds of the
foregoing. See "Description of the
Transfer and Servicing Agreements" herein
and in the Prospectus.
The Receivables consist of motor vehicle
retail installment contracts between an
Obligor and a Dealer. See "The Receivables
Pool" herein and "The Receivables Pools"
in the Prospectus.
The Receivables have been selected from
motor vehicle receivables owned by Paragon
based on the criteria specified in the
Sale and Servicing Agreement and described
herein and in the Prospectus. See "The
Receivables Pool" herein and "The
Receivables Pools" in the Prospectus. No
Receivable will have a scheduled maturity
that, after giving prospective effect to
any permitted extensions or such
deferrals, would be later than
____________ (the "Final Scheduled Payment
Date"). As of the Cutoff Date, the
weighted average remaining maturity of the
Receivables was approximately _____ months
and the weighted average original maturity
of the Receivables was approximately ____
months. As of the Cutoff Date,
approximately ____% of the aggregate
principal balance of the Receivables
represented financing of used vehicles and
the remainder represented financing of new
vehicles.
The"Aggregate Principal Balance" means, at
any time, the sum of the outstanding
Principal Balances of the Receivables.
"Principal Balance" means, with respect to
any Receivable, as of any date, the Amount
Financed minus that portion of all
payments (including all scheduled payments
and any prepayments in full or partial
prepayment) received on or prior to such
date and allocable to principal in
accordance with the [simple interest]
method. "Amount Financed" means, with
respect to a Receivable, the "amount
financed" within the meaning of the
S-5
<PAGE>
Federal Truth-in-Lending Act, which is the
aggregate amount of credit initially
extended under such Receivable toward the
purchase price of the Financed Vehicle and
related costs, including amounts of credit
extended in respect of accessories,
insurance premiums, service and warranty
policies or contracts and other items
customarily financed as part of motor
vehicle retail installment contracts.
Terms of the Notes
A. Payment Dates.......... Payments of interest and principal on the
Notes will be made on the [15th] day of
each month or, if any such day is not a
Business Day, on the next succeeding
Business Day (each, a "Payment Date"),
commencing ______________, ____. Payments
will be made to holders of record of the
Notes (the "Noteholders") as of the day
preceding such Payment Date (a "Record
Date"). "Business Day" means any day other
than a Saturday, Sunday or other day on
which commercial banking institutions or
trust companies in St. Louis, Missouri,
Los Angeles, California, New York, New
York or _____________, _____________ are
authorized or required to be closed.
B. Interest Rates......... The Class A-1 Notes will bear interest at
the rate of __% per annum (the "Class A-1
Interest Rate") and the Class A-2 Notes
will bear interest at the rate of __% per
annum (the "Class A-2 Interest Rate"). The
Class A-1 Interest Rate and the Class A-2
Interest Rate are referred to herein
collectively as "Interest Rates."
C. Interest............... Interest on the outstanding principal amount
of the Notes of each class will accrue at
the applicable Interest Rate from the
Closing Date (in the case of the first
Payment Date) and thereafter from (and
including) the preceding Payment Date
through (but excluding) the current
Payment Date (each an "Interest Period").
Interest on the Notes will be calculated
on the basis of a 360-day year consisting
of twelve 30-day months. See "Description
of the Notes--Payments of Interest."
D. Principal.............. Principal of the Notes will be payable on
each Payment Date in an amount equal to
the Noteholders' Principal Payment Amount
for the calendar month (the "Collection
Period") preceding such Payment Date.
No principal payments will be made on the
Class A-2 Notes until the Class A-1 Notes
have been paid in full.]
The outstanding principal amount of the
Class A-1 Notes, to the extent not
previously paid, will be payable on the
_____________, ____ Payment Date (the
"Class A-1 Final Scheduled Payment Date");
and the outstanding principal amount of
the Class A-2 Notes, to the extent not
previously paid, will be payable on the
____________, ____ Payment Date (the
"Class A-2 Final Scheduled Payment Date").
S-6
<PAGE>
E. Significant
Characteristics
of Class __ Notes...... [Interest will accrue on the Class __ Notes
from [the Closing Date] but no interest
will be payable on the Class __ Notes
until [the Payment Date on or after which
the Class __ Notes have been paid in
full]. [The Class __ Notes [do not bear
interest] [bear interest at a nominal
rate] and principal thereon is due and
payable on [and after] [the Payment Date
following the Payment Date on or after
which the Class __ Notes have been paid in
full] [each Payment Date to the extent
that principal available to be paid on the
Class __ Notes exceeds the amount
necessary to reduce the outstanding
principal balance of the Class __ Notes to
the [planned balance] for such Payment
Date. [No principal is payable with
respect to the Class __ Notes. The Class
__ Notes are entitled only to interest on
the [nominal] [notional] amount thereof,
as described above under "Principal."] As
a result, the yield to maturity on the
Class __ Notes will be particularly
sensitive to the rate and timing of
repayment, repurchase and defaults on the
Receivables.] [See "Risk Factors" and "The
Receivables Pool-- Weighted Average Life
of the Securities."]
F. Optional Repurchase
of Receivables;
Redemption............ The Servicer may purchase all the
Receivables and other Trust property on
any Payment Date after the Class A-1 Notes
have been repaid in full if, as of the
related Accounting Date, the Aggregate
Principal Balance has declined to less
than 10% of the Initial Pool Balance. In
such event, on the related Payment Date,
the Class A-2 Noteholders will receive as
a prepayment in full an amount equal to
the Class A-2 Note Balance plus accrued
and unpaid interest thereon at the Class
A-2 Interest Rate. See "Description of the
Notes--Optional Redemption." The "Initial
Principal Balance" will equal the
aggregate principal balance of the
Receivables as of the Cutoff Date.
[Terms of the Certificates
A. Payment Dates.......... Distributions with respect to the
Certificates will be made on each Payment
Date, commencing __________, ____.
Distributions will be made to holders of
record of the Certificates (the
"Certificateholders" and, together with
the Noteholders, the "Securityholders") as
of the related Record Date (which will be
the last Business Day of the preceding
month if Definitive Certificates are
issued).
B. Certificate Rate....... ___% per annum (the "Certificate Rate").
C. Interest............... On each Payment Date, the Owner Trustee will
distribute pro rata to Certificateholders
accrued interest at the Certificate Rate
on the outstanding Certificate Balance
generally to the extent of funds available
following payment of the Servicing
S-7
<PAGE>
Fee and distributions in respect of interest
on the Notes from the Payment Amount and
the Reserve Account. Interest will be
calculated on the basis of a 360-day year
consisting of twelve 30-day months.
Interest in respect of a Payment Date will
accrue from (and including) the Closing
Date (in the case of the first Payment
Date) and thereafter from (and including)
the preceding Payment Date to (but
excluding) such Payment Date.
D. Principal.............. No distributions of principal on the
Certificates will be made until all of the
Notes have been paid in full. On each
Payment Date commencing on the Payment
Date on which the Class A-2 Notes are paid
in full, principal of the Certificates
will be payable in an amount generally
equal to the Certificateholders' Principal
Payment Amount for the Collection Period
preceding such Payment Date, to the extent
of funds available therefor following
payment of the Servicing Fee, payments of
interest and principal, if any, due in
respect of the Notes and the distribution
of interest in respect of the
Certificates.
The outstanding principal amount, if any, of
the Certificates will be payable in full
on the __________ Payment Date (the
"Certificate Final Scheduled Payment
Date").
E. Optional Repurchase
of Receivables;
Prepayment............ The Servicer may purchase all the
Receivables and other Trust property on
any Payment Date if, as of the related
Accounting Date, the Aggregate Principal
Balance has declined to less than 10% of
the Initial Pool Balance. In such event,
on the related Payment Date, the
Certificateholders will receive as a
prepayment in full an amount equal to the
Certificate Balance plus accrued and
unpaid interest thereon at the Certificate
Rate. See "Description of the
Certificates--Optional Repurchase of
Receivables; Prepayment."]
[Pre-Funding Account....... During the period (the "Funding Period")
from and including the Closing Date until
the earliest of (i) the Determination Date
on which (a) the Pre-Funded Amount is less
than $________, (b) an Event of Default
has occurred under the Indenture or a
Servicer Termination Event has occurred
under the Sale and Servicing Agreement,
(c) certain events of insolvency have
occurred with respect to the Seller or the
Servicer or (ii) the close of business on
the ________ Payment Date, the Pre-Funded
Amount will be maintained in an account in
the name of the Indenture Trustee (the
"Pre- Funding Account"). The Pre-Funded
Amount is expected to initially equal
approximately $_____________ and, during
the Funding Period, will be reduced by the
principal balance of Subsequent
Receivables purchased by the Trust from
time to time in accordance with the Sale
and Servicing Agreement. The Seller
expects that the Pre-Funded Amount
S-8
<PAGE>
will be reduced to less than $_________ by
the ________ Payment Date. Any Pre-Funded
Amount remaining at the end of the Funding
Period will be payable to the Noteholders
and Certificateholders pro rata in
proportion to the respective principal
balances of each class of Notes and the
Certificates. See "Description of the
Transfer and Servicing Agreements --
Pre-Funding Account; Subsequent
Receivables."]
Reserve Account............ A reserve account (the "Reserve Account")
will be created with an initial deposit by
the Seller of cash or certain investments
having a value of at least $________ (the
"Reserve Account Deposit"). In addition,
on each Payment Date, any amounts on
deposit in the Collection Account with
respect to the preceding Collection Period
after payments to the Noteholders and the
Servicer have been made will be deposited
into the Reserve Account until the amount
of the Reserve Account is equal to the
Reserve Account Required Amount.
On each Payment Date, the Indenture Trustee
will withdraw funds from the Reserve
Account, to the extent of the funds
therein (exclusive of investment
earnings), to the extent (a) the sum of
the amounts required to be distributed to
Noteholders, [Certificateholders] and the
Servicer on the related Payment Date
exceeds (b) the amount on deposit in the
Collection Account with respect to the
preceding Collection Period (net of
investment income). If the amount in the
Reserve Account is reduced to zero,
Noteholders [and Certificateholders] will
bear the credit and other risks associated
with ownership of the Receivables,
including the risk that the Trust may not
have a perfected security interest in the
Financed Vehicles. See "Risk Factors"
herein and in the Prospectus, "Description
of the Certificates--The Reserve Account"
and "Certain Legal Aspects of the
Receivables" in the Prospectus.
Material Federal Income
Tax Consequences........... In the opinion of Mayer, Brown & Platt,
special tax counsel for the Issuer, for
federal income tax purposes, the Notes
will be characterized as debt, and the
Trust will not be classified as a separate
entity that is an association (or a
publicly traded partnership) taxable as a
corporation. Each Noteholder, by its
acceptance of a Note, will agree to treat
the Notes as indebtedness, [and each
Certificateholder, by its acceptance of a
Certificate, will agree to treat the Trust
as a partnership in which the
Certificateholders are partners for
federal, state and local tax purposes].
[Certificateholders should be aware that,
if the Trust does not have sufficient cash
to make cash distributions of interest to
Certificateholders, Certificateholders may
still be allocated income equal to the
amount of income that would accrue at the
Certificate Rate multiplied by the
Certificate Balance
S-9
<PAGE>
held by such Certificateholder. As a
consequence, cash basis holders would, in
effect, be required to report income from
the Certificates on the accrual basis and
Certificateholders may become liable for
taxes on Trust income even if they have
not received distributions of cash.] See
"Material Federal Income Tax Consequences"
and "State Tax Consequences" herein and in
the Prospectus for additional information
concerning the application of federal and
state tax laws to the Trust and the
Securities.
ERISA Considerations....... Subject to the considerations discussed
under "ERISA Considerations" herein and in
the Prospectus, the Notes are eligible for
purchase by employee benefit plans.
[The Certificates may not be acquired with
the assets of any employee benefit plan
subject to the Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Internal
Revenue Code of 1986, as amended (the
"Code"), or with the assets of an
individual retirement account.] See "ERISA
Considerations" herein and in the
Prospectus.
[Legal Investment.......... The Class A-1 Notes will be eligible
securities for purchase by money market
funds under paragraph (a)(10) of Rule 2a-7
under the Investment Company Act of 1940,
as amended.]
Rating of the Notes........ It is a condition to the issuance of the
Notes that the Class A-1 Notes be rated in
the highest [short-term] rating category
and that the Class A-2 Notes be rated in
the highest long- term rating category by
at least one nationally recognized
statistical rating agency (the "Rating
Agency"). The ratings of the Notes address
the likelihood of the timely payment of
interest on and the ultimate payment of
principal of the Notes pursuant to their
terms. These ratings are not a
recommendation to buy, sell or hold the
Notes. There can be no assurance that a
rating will not be lowered or withdrawn by
the Rating Agency if circumstances so
warrant. See "Risk Factors--Ratings of the
Securities" herein and in the Prospectus.
S-10
<PAGE>
RISK FACTORS
In addition to the other information contained herein and in the
Prospectus, prospective investors should consider carefully the following
risk factors and the information contained in "Risk Factors" in the
Prospectus.
[Certificates Subordinated to Notes
Distributions of interest and principal on the Certificates will
be subordinated in priority of payment to interest and principal due on the
Class A-1 Notes and Class A-2 Notes. Consequently, the Certificateholders
will not receive any distributions with respect to a Collection Period
until the full amount of interest on and principal of the Notes on such
Payment Date has been deposited in the Note Distribution Account. The
Certificateholders will not receive any distributions of principal until
the Payment Date on which the Class A-2 Notes were paid in full. However,
upon the occurrence and during the continuation of an Event of Default
which has resulted in an acceleration of the Notes, distributions of all
amounts on the Certificates will be subordinated in priority of payment to
payment in full of principal of the Notes.
If an Event of Default occurs and is not cured, the Indenture
Trustee or the holders of a majority of the aggregate principal amount of
all the Notes may declare the principal of the Notes to be immediately due
and payable, and the Indenture Trustee may institute or be required to
institute proceedings to collect amounts due or exercise its remedies as a
secured party (including foreclosure or sale of the Receivables). In the
event of a sale of Receivables by the Indenture Trustee following an Event
of Default, there is no assurance that the proceeds of such sale will be
equal to or greater than the aggregate outstanding principal amount of the
Notes and the Certificate Balance plus accrued interest. Because neither
interest nor principal is distributed to Certificateholders upon sale of
the Receivables following an Event of Default and acceleration of the Notes
under the Indenture until all the Notes have been paid in full, the
interests of Noteholders and the Certificateholders may conflict, and the
exercise by the Indenture Trustee of its right to sell the Receivables or
exercise other remedies under the Indenture and applicable law may cause
the Certificateholders to suffer a loss of all or part of their investment.
See "Description of the Notes--The Indenture--Events of Default; Rights
upon Event of Default" and "Description of the Transfer and Servicing
Agreements--Insolvency Event" in the Prospectus.
In general, the Seller may, and in certain circumstances the
Certificateholders may, direct the Owner Trustee in the administration of
the Trust. However, because the Trust has pledged the property of the Trust
to the Indenture Trustee to secure the payment of the Notes, including in
such pledge certain rights of the Trust under the Sale and Servicing
Agreement, the Indenture Trustee and not the Seller or the
Certificateholders has the power to direct the Trust to take certain
actions in connection with the administration of the property of the Trust
until the Notes have been paid in full and the lien of the Indenture has
been released. In addition, the Seller and Certificateholders are not
allowed to direct the Owner Trustee to take any action which conflicts with
the provisions of any of the Sale and Servicing Agreement, the Trust
Agreement or the Indenture (together the "Related Documents"). The
Indenture specifically prohibits the Issuer from taking any action which
would impair the Indenture Trustee's security interest in the Trust and
generally requires the Owner Trustee to obtain the consent of the Indenture
Trustee or the holders of a majority of the aggregate principal amount of
the Notes before modifying, amending, supplementing, waiving or terminating
any Related Document or any provision of any Related Document. Therefore,
until the Notes have been paid in full, the ability to direct the Trust
with respect to certain actions permitted to be taken by it under the
Related Documents rests with the Indenture Trustee and the Noteholders
instead of the Seller or the Certificateholders.
If a Servicer Termination Event were to occur, the holders of a
majority of the outstanding principal amount of the Notes, the Indenture
Trustee acting on behalf of the Noteholders, or the Owner Trustee and not
the Seller or the Certificateholders, would have the right to terminate the
Servicer as the servicer of the Receivables without consideration of the
effect such termination would have on Certificateholders. In addition, the
holders of not less than a majority of the outstanding principal amount of
the Notes would have the right to waive certain Servicer Termination
Events, without consideration of the effect such waiver would
S-11
<PAGE>
have on Certificateholders. See "Description of the Transfer and Servicing
Agreements--Servicer Termination Events" and "--Rights upon Servicer
Termination Events" in the Prospectus.]
Payments Will Be Made Only from the Limited Assets of the Trust
The Trust will not have, nor is it permitted or expected to have,
any significant assets or sources of funds other than the Receivables and
the Reserve Account. Holders of the Notes [and the Certificates] must rely
for repayment upon payments on the Receivables and, if and to the extent
available, amounts on deposit in the Reserve Account. Similarly, although
funds in the Reserve Account will be available on each Payment Date to
cover shortfalls in distributions of interest and principal on the Notes
[and the Certificates], amounts to be deposited in the Reserve Account are
limited in amount. If the Reserve Account is exhausted, the Trust will
depend solely on current distributions on the Receivables to make payments
on the Notes [and the Certificates].
Amounts on deposit in the Reserve Account will be available on any
Payment Date first to cover payment of Servicing Fees to the Servicer, then
shortfalls in distributions of interest on the Notes [and then shortfalls
in distributions of interest on Certificates]. [After distributions of
interest on the Certificates have been made, the remaining amounts on
deposit in the Reserve Account will be available first to cover shortfalls
in distributions of principal on the Notes and then shortfalls in
distributions of principal on the Certificates]. If the Reserve Account is
exhausted, the Trust will depend solely on payments on the Receivables to
make distributions on the [Notes] [Securities], and [Note] [Security]
holders will bear the risk of delinquency, losses and repossessions with
respect to the Receivables. There can be no assurance that the future
delinquency, loss and repossession experience of the Trust with respect to
the Receivables will be better or worse than that set forth herein with
respect to the portfolio of Receivables serviced by the Servicer. Any
amounts released from the Reserve Account to the Seller will not be
available to the [Notes] [Security] holders. See "The Receivables
Pool--Pool Composition" and "Delinquency and Net Losses" herein and "The
Receivables Pools" in the Prospectus and "Description of the Transfer and
Servicing Agreements--Subordination of Certificateholders; Reserve Account"
and "--Distributions" herein.
[Note][Security]holders Bear Reinvestment Risk and Payment Delay Risk Due
to Variations in Payment Rates on Receivables
The Class A-2 Notes will not receive any principal payments until
the Class A-1 Notes have been paid in full. [In addition, no principal
payments on the Certificates will be made until the Payment Date on which
the Notes are paid in full]. As the rate of payment of principal of the
Notes [and the Certificates] depends on the rate of payment (including
prepayments) of the principal balance of the Receivables, final payment of
the Notes [and the final distribution in respect of the Certificates] could
occur significantly earlier than the applicable Final Scheduled Payment
Date. It is expected that final payment of the Notes [and the final
distribution in respect of the Certificates] will occur on or prior to the
applicable Final Scheduled Payment Date. However, if sufficient funds are
not available to pay the Notes [or the Certificates] in full on or prior to
the applicable Final Scheduled Payment Date, final payment of the Notes
[and the final distribution in respect of the Certificates] could occur
later than such date. See "Weighted Average Life of the Securities" herein
and in the Prospectus.
[THE YIELD ON THE CLASS ____ NOTES WILL BE EXTREMELY SENSITIVE TO
THE RATE AND TIMING OF PAYMENTS (INCLUDING PREPAYMENTS) ON THE RECEIVABLES.
[AN INVESTOR PURCHASING A CLASS ____ NOTE AT A SIGNIFICANT PREMIUM COULD,
UNDER CERTAIN PREPAYMENT SCENARIOS, FAIL TO RECOUP ITS ORIGINAL
INVESTMENT.] [THE YIELD TO MATURITY ON THE CLASS ____ NOTES WILL BE
ADVERSELY AFFECTED BY A LOWER THAN ANTICIPATED RATE OF PAYMENT ON THE
RECEIVABLES.] [The reinvestment risk
to an investor in the Class ____ Notes may be exacerbated in the event of
[an increase in the rate of payment on the Receivables in a decreasing
interest rate environment] [a decrease in the rate of payment on the
Receivables in an increasing rate environment]. Any ratings assigned to the
Class ____ Notes by a Rating Agency will reflect only such Rating Agency's
assessment of the likelihood that timely distributions will be made with
respect to the Class ____ Notes in accordance with the Sale and Servicing
Agreement and the Indenture. Such rating will not constitute an assessment
S-12
<PAGE>
of the likelihood that principal prepayments on the Receivables will occur
or of the degree to which the rate of such prepayments might differ from
that originally anticipated. As a result, such rating will not address the
possibility that prepayment rates higher or lower than anticipated by an
investor may cause [such investor to experience a lower than anticipated
yield] [an investor purchasing a Class ____ Note at a significant premium
might fail to recoup its investment]. See "The Receivable Pool --
Sensitivity of the Class ____ Notes to Prepayments."]
Variations in Regional Economic Conditions May Cause Payment Reductions
or Delays
SIGNIFICANT GEOGRAPHIC CONCENTRATION MAY INCREASE THE EXPOSURE OF
THE TRUST TO THE ECONOMIC CONDITIONS IN THOSE STATES. Economic conditions
in states where Obligors reside may affect the delinquency, loss and
repossession experience of the Trust with respect to the Receivables.
Obligors on Receivables representing approximately ___%, ___%, ___% and __%
by principal balance of the Receivables were located in ________, ________,
________ and ________ at the Cutoff Date. As a result, economic conditions
in such states may have a disproportionate effect on prepayments and/or
defaults in respect of the Receivables and thus on amounts available for
distribution to Securityholders. In particular, an economic downturn in one
or more of such states could adversely affect the performance of the Trust
as a whole (even if national economic conditions remain unchanged or
improve) as obligors in such states experience the effects of such a
downturn and face greater difficulty in making payments on their Financed
Vehicles. See "The Receivables Pool" herein.
Ratings of the Securities Do Not Address Suitability of Investment
It is a condition to the issuance of the Notes [and the
Certificates] that the Class A-1 Notes be rated in the highest [short-term]
rating category and that the Class A-2 Notes be rated in the highest
long-term rating category by at least one nationally recognized statistical
rating agency. A rating is not a recommendation to purchase, hold or sell
Securities, inasmuch as such rating does not comment as to market price or
suitability for a particular investor. The ratings of the Securities
address the likelihood of the payment of principal and interest on the
Securities pursuant to their terms. There can be no assurance that a rating
will remain for any given period of time or that a rating will not be
lowered or withdrawn entirely by a Rating Agency if in its judgment
circumstances in the future so warrant.
THE TRUST
General
The Issuer, Paragon Auto Receivables Owner Trust ____-_, is a
trust formed, prior to its purchase of the Receivables and the issuance of
the [Notes][Securities], under the laws of the State of Delaware pursuant
to the Trust Agreement for the transactions described in this Prospectus
Supplement. After its formation, the Trust will not engage in any activity
other than acquiring, holding and managing the Receivables and the other
assets of the Trust and proceeds therefrom and issuing the Notes and
Certificates and making payments thereon.
At the time the Notes and Certificates are issued, the Trust will
be capitalized with equity in an amount equal to the Certificate Balance of
$__________, excluding amounts deposited in the Reserve Account. The equity
of the Trust, together with the net proceeds from the sale of the Notes,
will be used by the Trust to purchase the Receivables from the Seller
pursuant to the Sale and Servicing Agreement [or to repayment of any
related Warehouse Financing].
If the protection provided to the investment of the [Notes]
[Security] holders by the Reserve Account is insufficient, the Trust will
look only to the Obligors on the Receivables, the proceeds from the
repossession and sale of Financed Vehicles which secure defaulted
Receivables and the proceeds from any Dealer Recourse. In such event,
certain factors, such as the Trust's not having first priority perfected
security interests in some of the Financed Vehicles, may affect the Trust's
ability to realize on the collateral securing the Receivables, and thus may
reduce the proceeds to be distributed to [Note] [Security] holders with
respect to the [Notes] [Securities]. See "Description of the Transfer and
S-13
<PAGE>
Servicing Agreements--Distributions" and "--Reserve Account" and "Certain
Legal Aspects of the Receivables" in the Prospectus.
The Trust's principal offices are in [Delaware], in care of
__________________, as Owner Trustee, at the address listed below under
"--The Owner Trustee".
Capitalization of the Trust
The following table illustrates the capitalization of the Trust as
of the Closing Date, as if the issuance and sale of the Notes and the
Certificates have taken place on such date:
Class A-1 __% Asset Backed Notes................. $
------------------
Class A-2 __% Asset Backed Notes.................
------------------
__% Asset Backed Certificates....................
------------------
Total............................................ $
==================
The Owner Trustee
_______________ is the Owner Trustee under the Trust Agreement.
_____________ is a __________________ and its principal offices where
information can be obtained relating to the Trust and the Certificates are
located at _____________________. The Seller and its affiliates may
maintain normal commercial banking relations with the Owner Trustee and its
affiliates.
THE RECEIVABLES POOL
The Receivables were purchased or originated by Paragon in the
ordinary course of its business. The pool of Receivables (the "Receivables
Pool") will consist of Receivables purchased by the Trust as of the Cutoff
Date. The Receivables have been selected from the Receivables portfolio of
Paragon for inclusion in the Receivables Pool by several criteria, some of
which are set forth in the Prospectus under "The Receivables Pool," as well
as the requirement that each Receivable: (a) had no amount due 10% or more
of which was more than 29 days past due as of the Cutoff Date; (b) has an
APR of not less than _____% and not more than _____%; [(c) provides for
level monthly payments that fully amortize the amount financed over an
original term of at least_____ months and not more than ____ months
(provided payments are made on the applicable due dates [and except that
the final payment may differ]);] (d) had an outstanding Principal Balance
as of the Cutoff Date of not less than $_______ and not more than $_______;
and (e) had a remaining term as of the Cutoff Date of at least ___ months
and not more than ___ months. The Receivables were originated on or before
________, ____. The composition of the Receivables Pool as of the Closing
Date will not deviate from the composition of the Receivables Pool as of
the Cutoff Date. No selection procedures believed by the Seller to be
adverse to the [Note] [Security] holders were used in selecting the
Receivables.
The tables below set forth information regarding the composition
and characteristics of the Receivables Pool as of the Cutoff Date.
S-14
<PAGE>
Composition of the Receivables
as of the Cutoff Date
Aggregate Principal Balance........................................$___________
Number of Receivables....................................................._____
Average Amount Financed............................................$___________
Range of Amounts Financed..........................$___________ to $___________
Average Remaining Principal Balance................................$___________
Range of Remaining Principal Balances..............$___________ to $___________
Weighted Average APR....................................................._____%
Range of APRs.................................................._____% to _____%
Weighted Average Original Term to Maturity (1)......................____ months
Range of Original Terms to Maturity.........................____ to ____ months
Weighted Average Remaining Term to Maturity (1).....................____ months
Range of Remaining Terms to Maturity........................____ to ____ months
New Vehicles (Percentage of Aggregate Principal
Balance).................................................................____%
Used Vehicles (Percentage of Aggregate Principal
Balance).................................................................____%
(1) Rounded to the nearest month.
S-15
<PAGE>
Distribution of the Receivables by APR
as of the Cutoff Date
Percentage
Aggregate by Aggregate Percentage
Principal Principal Number of by Number of
APR Range Balance Balance (1) Receivables Receivables (1)
- - ------------- -------------- ------------ ------------- -------------
% $ % %
___________ _______ _________ ________
TOTAL $ 100.00% 100.00%
(1) Percentages may not add up to 100.00% because of rounding.
Distribution of Receivables by Principal Place of Business of Dealer
as of the Cutoff Date
Percentage
Aggregate by Aggregate Percentage
Principal Principal Number of by Number of
State Balance Balance (1) Receivables Receivables (1)
- - ------------- -------------- ------------ ------------- -------------
% $ % %
___________ _______ _________ ________
TOTAL $ 100.00% 100.00%
(1) Percentages may not add up to 100.00% because of rounding.
S-16
<PAGE>
Distribution by Original Term to Scheduled Maturity of the Receivables
as of the Cutoff Date
Percentage
Range of Aggregate by Aggregate Percentage
Original Principal Principal Number of by Number of
Terms Balance Balance (1) Receivables Receivables (1)
- - ------------- -------------- ------------ ------------- -------------
to months $ % %
to months
to months
to months
to months
to months
to months
to months
to months
months
___________ _______ _________ ________
TOTAL $ 100.00% 100.00%
(1) Percentages may not add up to 100.00% because of rounding.
Distribution by Remaining Term to Scheduled Maturity of the Receivables
as of the Cutoff Date
Percentage
Range of Aggregate by Aggregate Percentage
Remaining Principal Principal Number of by Number of
Terms Balance Balance (1) Receivables Receivables (1)
- - ------------- -------------- ------------ ------------- -------------
to months $ % %
to months
to months
to months
to months
to months
to months
to months
to months
to months
months
___________ _______ _________ ________
TOTAL $ 100.00% 100.00%
(1) Percentages may not add up to 100.00% because of rounding.
S-17
<PAGE>
<TABLE>
<CAPTION>
Distribution of Receivables by Amount Financed
as of the Cutoff Date
Percentage
Aggregate by Aggregate Percentage
Principal Principal Number of by Number of
Amount Financed Balance Balance (1) Receivables Receivables (1)
- - --------------- ----------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
$5,000.00 to $9,999.99 $ % %
$10,000.00 to $14,999.99
$15,000.00 to $19,999.99
$20,000.00 to $24,999.99
$25,000.00 to $29,999.99
$30,000.00 to $34,999.99
$35,000.00 to $39,999.99
$40,000.00 to $44,999.99
$45,000.00 to $49,999.99
$50,000.00 to $54,999.99
$55,000.00 to $59,999.99
$60,000.00 to $64,999.99
$65,000.00 to $69,999.99
$100,000.00 and above
___________ ________ ___________ ___________
TOTAL $ 100.00% 100.00%
(1) Percentages may not add up to 100.00% because of rounding.
<CAPTION>
Distribution of Receivables by Current Principal Balance
as of the Cutoff Date
Percentage
Aggregate by Aggregate Percentage
Current Principal Principal Number of by Number of
Principal Balance Balance Balance (1) Receivables Receivables (1)
- - ----------------- ----------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
$5,000.00 to $9,999.99 $ % %
$10,000.00 to $14,999.99
$15,000.00 to $19,999.99
$20,000.00 to $24,999.99
$25,000.00 to $29,999.99
$30,000.00 to $34,999.99
$35,000.00 to $39,999.99
$40,000.00 to $44,999.99
$45,000.00 to $49,999.99
$50,000.00 to $54,999.99
$55,000.00 to $59,999.99
$60,000.00 to $64,999.99
$95,000.00 to $99,999.99
___________ ________ ___________ ___________
TOTAL $ 100.00% 100.00%
(1) Percentages may not add up to 100.00% because of rounding.
</TABLE>
S-18
<PAGE>
Delinquencies and Loss Experience
The following tables set forth information relating to the
delinquency and loss experience of Paragon for the periods indicated. There
is no assurance that the delinquency and credit loss experience with
respect to Paragon's automobile, light duty truck and sports utility
vehicle installment contracts in the future, or that the experience of the
Receivables owned by the Trust and pledged to the Indenture Trustee for the
benefit of the [Note][Security] holders, will be similar to that set forth
below.
Paragon began acquiring contracts in August of 1996.
Delinquencies, repossessions and net losses have increased steadily since
that time due to seasoning of the pool of contracts. Fluctuations in
delinquencies, repossessions and losses generally follow trends in the
overall economic environment and may be affected by such factors as
increased competition for obligors, the supply of and demand for
automobiles, light duty trucks and sports utility vehicles, rising consumer
debt burden per household and increases in personal bankruptcies. The
credit enhancement for the Trust has been designed to protect
[Note][Security] holders against increases in delinquencies and losses. If,
however, any such increase is greater than anticipated, delays in payments
of collections of the Receivables could occur or reductions in the amount
of payments to [Note][Security] holders could result.
For a description of Paragon's underwriting and collections
practices, see "The Receivables Pools--Underwriting" and "--Servicing and
Collections" in the Prospectus.
S-19
<PAGE>
<TABLE>
<CAPTION>
PARAGON ACCEPTANCE CORPORATION
Historical Delinquency Experience
As of
9/30/96 12/31/96 3/31/97 6/30/97 9/30/97
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Aggregate Principal No. of contracts 77 486 1,180 2,090 3,292
Balance at Period End (1) Amount ($) 1,169,188 7,889,627 19,105,772 33,882,836 53,902,072
------------------- ------------ ----------- ------------ ------------ ------------
Delinquencies
30 - 59 days No. of contracts 0 2 4 14 47
Pay Off Balance ($) 0 21,084 68,810 283,003 723,757
% of Principal 0.00% 0.27% 0.36% 0.84% 1.34%
60 - 89 days No. of contracts 0 0 0 3 3
Pay Off Balance ($) 0 0 0 34,773 33,718
% of Principal 0.00% 0.00% 0.00% 0.10% 0.06%
90 days or more No. of contracts 0 0 0 0 3
Pay Off Balance ($) 0 0 0 0 49,982
% of Principal 0.00% 0.00% 0.00% 0.00% 0.09%
------------ ----------- ----------- ----------- -------------
Total Delinquencies No. of contracts 0 2 4 17 53
Pay Off Balance ($) 0 21,084 68,810 317,776 807,457
% of Principal 0.00% 0.27% 0.36% 0.94% 1.50%
Amount in No. of vehicles 0 0 2 6 4
Repossession Pay Off Balance ($) 0 0 33,804 105,815 94,154
Inventory % of Principal 0.00% 0.00% 0.18% 0.31% 0.17%
------------ ----------- ----------- ----------- -------------
Total Delinquencies No. of contracts &
and Amount in vehicles 0 2 6 23 57
Repossession Pay Off Balance ($) 0 21,084 102,614 423,591 901,611
% of Principal 0.00% 0.27% 0.54% 1.25% 1.67%
============ ============ =========== =========== =============
<CAPTION>
PARAGON ACCEPTANCE CORPORATION
Historical Delinquency Experience
12/31/97 3/31/98 6/30/98 9/30/98
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Aggregate Principal No. of contracts 4,576 6,471 8,667 10,435
Balance at Period End (1) Amount ($) 75,755,941 107,228,391 145,663,968 176,207,183
----------------- ----------- ------------ ------------ ------------
Delinquencies 66 68 132 136
30 - 59 days No. of contracts 1,031,132 1,189,755 2,213,174 2,231,656
Pay Off Balance ($) 1.36% 1.11% 1.52% 1.27%
% of Principal 10 13 22 37
60 - 89 days No. of contracts 160,904 219,789 405,439 565,302
Pay Off Balance ($) 0.21% 0.21% 0.28% 0.32%
% of Principal 1 7 4 10
90 days or more No. of contracts 14,185 111,797 92,083 143,667
Pay Off Balance ($) 0.02% 0.10% 0.06% 0.08%
% of Principal ------------ ------------ ------------- ------------
77 88 158 183
Total Delinquencies No. of contracts 1,206,221 1,521,342 2,710,696 2,940,625
Pay Off Balance ($) 1.59% 1.42% 1.86% 1.67%
% of Principal 7 19 24 24
Amount in No. of vehicles 112,910 241,598 434,530 368,665
Repossession Pay Off Balance ($) 0.15% 0.23% 0.30% 0.21%
Inventory % of Principal ------------ ------------- ------------- -------------
Total Delinquencies No. of contracts & 84 107 182 207
and Amount in vehicles 1,319,131 1,762,940 3,145,226 3,309,290
Repossession Pay Off Balance ($) 1.74% 1.64% 2.16% 1.88%
% of Principal ============ ============= ============= ===========
(1) Aggregate Principal Balance equals the net finance receivables for all contracts serviced,
excluding repossessed vehicles. The amounts are on a basis consistent with Paragon's
financial statement presentation of Contracts Held for Sale, and include such items as
unamortized dealer participation and deferred initial direct costs, reserve for losses
and unearned finance charges on precomputed contracts.
</TABLE>
S-20
<PAGE>
<TABLE>
<CAPTION>
PARAGON ACCEPTANCE CORPORATION
Historical Net Loss Experience
During the Three-Month Period Ended
9/30/96 12/31/96 3/31/97 6/30/97 9/30/97 12/31/97
------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Average Aggregate
Principal Balance $443,904 $4,229,961 $13,791,251 $26,544,803 $43,690,638 $64,796,884
======== ========== =========== =========== =========== ===========
Gross Charge-Offs(1) $0 $0 $4,006 $42,227 $103,098 $228,598
Recoveries(2) $0 $0 $0 $985 $102 $80
----- ------- ------ ----- ------- ------
Net Losses $0 $0 $4,006 $41,242 $102,996 $228,518
===== ====== ====== ======== ======== ========
Net Losses as a Percentage
of Average Aggregate
Principal Balance(3) 0.00% 0.00% 0.03% 0.16% 0.24% 0.35%
===== ===== ===== ===== ===== =====
<CAPTION>
PARAGON ACCEPTANCE CORPORATION
Historical Net Loss Experience
During the
During the Three-Month Period Ended Year Ended
3/31/98 6/30/98 9/30/98 9/30/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
Average Aggregate
Principal Balance $90,934,548 $126,481,513 $160,920,635 $111,068,155
=========== ============ ============ ============
Gross Charge-Offs(1) $235,758 $573,477 $577,162 $1,614,995
Recoveries(2) $23,224 $84,559 $189,766 $297,629
-------- ------- -------- --------
Net Losses $212,534 $488,918 $387,396 $1,317,366
======== ======== ======== ==========
Net Losses as a Percentage
of Average Aggregate
Principal Balance(3) 0.23% 0.39% 0.24% 1.19%
===== ===== ===== =====
</TABLE>
(1) Gross Charge-Offs are defined as principal balance at time of
charge-off less net sale proceeds.
(2) Recoveries are post charge-off amounts that are collected and applied
toward the obligors' deficiency balance.
(3) Percentages are not annualized.
S-21
<PAGE>
Year 2000 Compliance
The year 2000 issue is the result of computer programs
being written to store and process data using two digits rather than four
to define the applicable year. Any computer programs used by Paragon that
have date sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations. Paragon's critical
computer applications software is not maintained in-house. Rather, Paragon
operates under service agreements with outside vendors that provide Paragon
(and many other institutions) access to the applications that are
maintained by the vendors and run on the vendors' mainframe computers.
These critical applications have been certified as year 2000 compliant.
Paragon has also assessed the potential impact of year 2000 noncompliance
on the part of other external relationships and, subject to Paragon's
ongoing review of vendors' year 2000 compliance, Paragon is not aware at
this time of any such issues that would have a material adverse effect on
Paragon's financial position, cash flows or results of operations. As a
result, subject to Paragon's ongoing compliance efforts, the costs and
uncertainties relating to timely resolution of year 2000 issues applicable
to Paragon's business and operations are not reasonably expected by the
Seller to have a material adverse effect on Paragon's financial position,
cash flows or results of operations. The preceding two sentences are
forward-looking statements and the actual costs could differ materially
from the costs currently anticipated by Paragon.
THE SELLER, THE SERVICER AND PARAGON
The Seller is a wholly-owned subsidiary of Paragon. Information
regarding the Seller is set forth under "The Seller" in the Prospectus and
additional information about Paragon and the Servicer is set forth under
"Paragon and the Servicer" in the Prospectus. Paragon was incorporated in
the State of Delaware in November 1994 and began purchasing contracts in
August 1996. Paragon was initially capitalized with approximately
$8,400,000 in preferred and common stock held by an investment fund managed
by Triumph Capital Group, Inc. ("Triumph") and Paragon's senior management.
Triumph is a private investment management company founded in 1990 and
based in Boston, Massachusetts. Triumph manages three early stage and
mezzanine investment funds for institutional investors with capital
commitments equal to approximately $500,000,000. In April 1998, Paragon
issued approximately $14,000,000 in additional preferred and common stock
to three institutional investors not affiliated with Triumph. Other funding
sources available to Paragon include a warehouse lending facility provided
by ContiTrade Services, L.L.C. ("CTS"), and a $4,000,000 subordinated
lending facility also provided by CTS. CTS holds a warrant to purchase up
to approximately 7.5% of the common stock of Paragon.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Information regarding certain maturity and prepayment considerations
with respect to the Securities is set forth under "Weighted Average Life of
Securities" in the Prospectus. No principal payments will be made on the
Class A-2 Notes until all Class A-1 Notes have been paid in full. In
addition, no principal payments on the Certificates will be made until all of
the Notes have been paid in full. See "Description of the Notes--Payments of
Principal" and "Description of the Certificates--Distributions of Principal
Payments." As the rate of payment of principal of each class of Notes and the
Certificates depends primarily on the rate of payment (including prepayments)
of the principal balance of the Receivables, final payment of any class of
the Notes and the final distribution in respect of the Certificates could
occur significantly earlier than the respective Final Scheduled Payment
Dates. It is expected that final payment of the Notes and the final
distribution in respect of the Certificates will occur on or prior to the
applicable Final Scheduled Payment Date. However, if sufficient funds are not
available to pay the Notes or the Certificates in full on or prior to the
applicable Final Scheduled Payment Date, final payment of the Notes and the
final distribution in respect of the Certificates could occur later than such
date.
S-22
<PAGE>
DESCRIPTION OF THE NOTES
General
The Notes will be issued pursuant to the Indenture, a form of
which has been filed as an exhibit to the Registration Statement. A copy of
the Indenture will be filed with the Commission following the issuance of
the Securities. The following summary supplements the description of the
general terms and provisions of the Notes of any given series and the
related Indenture set forth in the Prospectus, to which description
reference is hereby made. The following summary, together with the related
description in the Prospectus, describes all of the material terms of the
Notes and the Indenture, but it does not purport to be complete and is
subject to, and is qualified by reference to, all the provisions of the
Notes and the Indenture. Where particular provisions or terms used in the
Indenture are referred to, the actual provisions (including definitions of
terms) are incorporated by reference as part of such summary.
_____________________ will be the Indenture Trustee under the Indenture.
The address of the Indenture Trustee at which information regarding the
Trust and Notes may be obtained is ________________.
Payments of Interest
Each class of the Notes will constitute Fixed Rate Securities, as
such term is defined under "Certain Information Regarding the
Securities--Fixed Rate Securities" in the Prospectus. Interest on the
principal balances of the classes of the Notes will accrue at their
respective per annum Interest Rates and will be payable to the Noteholders
monthly on each Payment Date, commencing , ____. Interest on the
outstanding principal amount of the Notes will accrue at the applicable
Interest Rate for the applicable Interest Accrual Period. Interest
distributions due for any Payment Date but not distributed on such Payment
Date will be due on the next Payment Date increased by an amount equal to
interest on such amount at the applicable Interest Rate (to the extent
lawful). Interest on the Notes will be calculated on the basis of a 360-day
year consisting of twelve 30-day months. Interest payments on the Notes
will be derived from the Payment Amount remaining after the payment of the
Servicing Fee. See "Description of the Transfer and Servicing
Agreements--Distributions" and "--Reserve Account."
Interest payments to both classes of Noteholders will have the
same priority. Under certain circumstances, the amount available for
interest payments could be less than the amount of interest payable on the
Notes on any Payment Date, in which case each class of Noteholders will
receive their ratable share (based upon the aggregate amount of interest
due to such class of Noteholders) of the aggregate amount available to be
distributed in respect of interest on the Notes.
Payments of Principal
Principal payments will be made to the Noteholders on each Payment
Date in an amount equal to the Noteholders' Principal Payment Amount.
Principal payments on the Notes will be derived from the Payment Amount
remaining after the payment of the Servicing Fee and the Noteholders'
Interest Payment Amount. See "Description of the Transfer and Servicing
Agreements--Distributions" and "--Reserve Account."
On the eighth day of the calendar month during which any Payment
Date occurs (or, if such day is not a Business Day, the next Business Day)
(a "Determination Date"), the Indenture Trustee shall determine the amount
in the Collection Account allocable to interest and the amount allocable to
principal.
On each Payment Date, principal payments on the Notes will be
applied in the following order of priority: (a) to the principal balance of
the Class A-1 Notes until the principal balance of the Class A-1 Notes is
reduced to zero; and (b) to the principal balance of the Class A-2 Notes
until the principal balance of the Class A-2 Notes is reduced to zero. The
principal balance of the Class A-1 Notes, to the extent not previously
paid, will be due on the Class A-1 Final Scheduled Payment Date and the
principal balance of the Class A-2 Notes, to the extent not previously
paid, will be due on the Class A-2 Final Scheduled Payment Date. The actual
date on which the aggregate outstanding principal amount of either class of
Notes is paid may be earlier than the respective final
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scheduled Payment Dates set forth above based on a variety of factors,
including those described under "Weighted Average Life of the Securities"
herein and in the Prospectus.
Optional Repurchase of Receivables; Redemption
On any Payment Date after the Class A-1 Notes have been paid in
full, the Class A-2 Notes will be redeemed in whole, but not in part, if
the Servicer exercises its option to purchase the Receivables. The Servicer
may purchase the Receivables when the Aggregate Principal Balance shall
have declined to 10% or less of the Initial Principal Balance, as described
in the Prospectus under "Description of the Transfer and Servicing
Agreements--Termination." The redemption price will be equal to the unpaid
principal amount of the Class A-2 Notes plus accrued and unpaid interest
thereon.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to the Trust Agreement, a
form of which has been filed as an exhibit to the Registration Statement. A
copy of the Trust Agreement will be filed with the Commission following the
issuance of the Securities. The following summary supplements the
description of the general terms and provisions of the Certificates of any
given series and the related Trust Agreement set forth in the Prospectus,
to which description reference is hereby made. The summary, together with
the related description in the Prospectus, describes all of the material
terms of the Certificates and the Trust Agreement, but it does not purport
to be complete and is subject to, and qualified by reference to, all the
provisions of the Certificates and the Trust Agreement.
Distribution of Interest Income
On each Payment Date, commencing ________ ___, ____, the
Certificateholders will be entitled to distributions in an amount equal to
the amount of interest that would accrue on the Certificate Balance at the
Certificate Rate. The Certificates will constitute Fixed Rate Securities,
as such term is defined under "Certain Information Regarding the
Securities--Fixed Rate Securities" in the Prospectus. Interest in respect
of a Payment Date will accrue from the Closing Date (in the case of the
first Payment Date) and thereafter, from the [15th] day of the month
preceding the month of the Payment Date to and including the ___ day of the
month of such Payment Date. Interest distributions due for any Payment Date
but not distributed on such Payment Date will be due on the next Payment
Date increased by an amount equal to interest on such amount at the
Certificate Rate (to the extent lawful). Interest distributions with
respect to the Certificates will be funded from the portion of the Payment
Amount and the funds in the Reserve Account remaining after the
distribution of the Servicing Fee and the Noteholders' Interest Payment
Amount. See "Description of the Transfer and Servicing
Agreements--Distributions" and "--Reserve Account."
Distributions of Principal Payments
Certificateholders will be entitled to distributions of principal
on each Payment Date, commencing with the Payment Date on which the Notes
are paid in full, in an amount equal to the Principal Distribution Amount
(less on the Payment Date on which the Notes are paid in full, the portion
thereof payable on the Notes). Distributions with respect to principal
payments will be funded from the portion of the Principal Distribution
Amount remaining after the distribution of the Servicing Fee, the
Noteholders' Distributable Amount (on the Payment Date on which the Notes
are paid in full) and the Certificateholders' Interest Payment Amount. See
"Description of the Transfer and Servicing Agreements--Distributions" and
"--Reserve Account".
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Optional Repurchase of the Receivables; Prepayment
If the Servicer exercises its option to purchase the Receivables
when the Aggregate Principal Balance declines to 10% or less of the Initial
Principal Balance, the Servicer may purchase all remaining Trust Property
on any Payment Date occurring in a subsequent Collection Period and cause
the prepayment of the Certificates in an amount equal to the Certificate
Balance plus accrued and unpaid interest thereon at the Certificate Rate.
See "Description of the Transfer and Servicing Agreements--Termination" in
the Prospectus.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Sale and
Servicing Agreement and the Trust Agreement. Forms of the Sale and
Servicing Agreement and the Trust Agreement have been filed as exhibits to
the Registration Statement. A copy of the Sale and Servicing Agreement will
be filed with the Commission following the issuance of the Securities. The
summary describes the material terms of the Sale and Servicing Agreement
and the Trust Agreement, but it does not purport to be complete and is
subject to, and qualified by reference to, all the provisions of the Sale
and Servicing Agreement and the Trust Agreement. The following summary
supplements the description of the general terms and provisions of the Sale
and Servicing Agreement and the Trust Agreement set forth in the
Prospectus, to which description reference is hereby made.
Accounts
Accounts referred to under "Description of the Transfer and
Servicing Agreements--Accounts" in the Prospectus, as well as the Reserve
Account, will be established by the Servicer and maintained in the name of
the Indenture Trustee on behalf of the Noteholders [and the
Certificateholders]. Amounts held from time to time in the Reserve Account
will be held for the benefit of Noteholders [and Certificateholders]. Funds
on deposit in the Reserve Account will be invested in Eligible Investments
selected by the Seller and, if permitted by the Rating Agency, funds on
deposit in the Reserve Account may be invested in Eligible Investments that
mature later than the next Payment Date. Upon any distribution to the
Servicer of amounts from the Reserve Account, the Securityholders will not
have any rights in, or claims to, such amounts. On or before each Payment
Date, funds in the amount of the Deficiency Claim Amount for such Payment
Date will be withdrawn from the Reserve Account and deposited in the
Collection Account.
On each Payment Date, the Trustee will withdraw funds from the
Reserve Account in the amount of the Deficiency Claim Amount. Such
withdrawal may result from, among other things, Receivables becoming
Liquidated Receivables or the failure by the Servicer to make any
remittance required to be made under the Agreement. The aggregate amount to
be withdrawn from the Reserve Account on any Payment Date will not exceed
the amount available in the Reserve Amount with respect to the related
Payment Date. The Trustee will deposit the proceeds of such withdrawal into
the Collection Account on or before the Payment Date with respect to which
such withdrawal was made.
Subject to reduction as described below, the "Reserve Account
Required Amount" means the greater of (i) _____% of the Aggregate Principal
Balance (after giving effect to any distributions on the Securities on such
Payment Date) and (ii) the Floor Amount; [provided, that if a Trigger Event
has occurred and has not been Deemed Cured, the Reserve Account Required
Amount will be ___% of the Aggregate Principal Balance (after giving effect
to any distributions on the Securities on such Payment Date)]. The Reserve
Account Required Amount may be reduced from time to time if the Rating
Agency has delivered prior written notice to the Seller, the Servicer, the
Indenture Trustee and the Owner Trustee that such reduction will not result
in a reduction, withdrawal or qualification of the Rating Agency's then
current ratings of each class of the Notes and the Certificates. The time
necessary for the Reserve Account to reach and maintain the Reserve Account
Required Amount at any time after the Closing Date will be affected by the
delinquency, credit loss, repossession and prepayment experience of the
Receivables and, therefore, cannot be accurately predicted. Amounts on
deposit in the Reserve Account will be
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released to the Servicer on each Payment Date to the extent that the amount
on deposit in the Reserve Account would exceed the Reserve Account Required
Amount.
"Liquidation Proceeds" with respect to a Liquidated
Receivable means all amounts realized with respect to such
Receivable (other than amounts withdrawn from the Reserve Account)
net of (i) reasonable expenses incurred by the Servicer in
connection with the collection of such Receivable and the
repossession and disposition of the related Financed Vehicle and
(ii) amounts that are required to be refunded to the Obligor on
such Receivable; provided, however, that the Liquidation Proceeds
with respect to any Receivable will in no event be less than zero.
"Floor Amount" with respect to any Payment Date means the
lesser of (i) the aggregate outstanding principal amount of the
Notes [and the Certificate Balance] (after giving effect to any
distributions on the [Notes] [Securities] on such Payment Date)
and (ii) $__________________.
"Deficiency Claim Amount" means, with respect to any
Determination Date, the positive difference of (i) the sum of the
Servicing Fee for the related Collection Period and all accrued
and unpaid Servicing Fees for prior Collection Periods, the
Noteholders' Interest Payment Amount, the Certificateholders'
Interest Payment Amount, the Noteholders' Principal Payment Amount
and the Certificateholders' Principal Payment Amount for such
Payment Date minus (ii) the amount of Available Funds with respect
to such Determination Date, which amount will be withdrawn from
the Reserve Account to the extent funds are on deposit therein and
deposited into the Collection Account on the related Payment Date.
If funds in the Reserve Account are reduced to zero, the [Note]
[Security] holders will bear the credit and other risks associated with
ownership of the Receivables. In such a case, the amount available for
distribution may be less than that described below, and the [Note]
[Security] holders may experience delays or suffer losses as a result,
among other things, of defaults or delinquencies by the Obligors or
previous extensions made by the Servicer.
[Pre-Funding Account; Subsequent Receivables]
[On the Closing Date, approximately $____________ of Initial
Receivables will be transferred to the Trust by the Seller and the
approximately $______________ Pre-Funded Amount will be deposited by the
Trust in the Pre-Funding Account. If the principal amount of eligible
Receivables originated by Paragon during the Funding Period is less than
the Pre-Funded Amount, the Seller will have insufficient Receivables to
sell to the Trust on the Subsequent Transfer Dates, thereby resulting in a
prepayment of principal to the Noteholders and the Certificateholders as
described in the following paragraph.] [In addition, any conveyance of
Subsequent Receivables is subject to the satisfaction, on or before the
related Subsequent Transfer Date, of the condition that each such
Subsequent Receivable satisfies the eligibility criteria specified in "The
Receivables Pool" herein and "The Receivables Pools" in the Prospectus.]
[To the extent that the Pre-Funded Amount has not been fully
applied to the purchase of Subsequent Receivables by the Trust during the
Funding Period, the Noteholders and the Certificateholders will receive, on
the Payment Date on or immediately following the last day of the Funding
Period, a prepayment of principal in an amount equal to their pro rata
share (based on the current principal balance of each class of Notes and
the Certificate Balance) of any remaining Pre-Funded Amount following the
purchase of any Subsequent Receivables on such Payment Date. It is
anticipated that the principal amount of Subsequent Receivables sold to the
Trust will not be exactly equal to the original Pre-Funded Amount and that
therefore there will be at least a nominal amount of principal prepaid to
the Noteholders and to the Certificateholders.]
[If the amount of the Pre-Funding Account will exceed 25% of the
aggregate proceeds from the offering, include the specific investments in
which the Pre-Funding Account will be invested and specify that the actual
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investments of the Pre-Funding Account as of the end of the preceding month
will be provided in the periodic reports on Form 8-K and Form 10-K to be
filed by the Seller with respect to the Trust.]
Servicing Compensation and Payment of Expenses
The Servicing Fee Rate will be 1.0% per annum of the Aggregate
Principal Balance as of the opening of business on the first day of the
related Collection Period. See "Description of the Transfer and Servicing
Agreements--Servicing Compensation and Payment of Expenses" in the
Prospectus. The Servicer will also collect and retain any late fees,
non-sufficient funds fees, liquidation fees and other administrative fees
(the "Supplemental Servicing Fee") with respect to the Receivables.
Payments by or on behalf of Obligors will be allocated to scheduled
payments and late fees and other charges in accordance with the Servicer's
normal practices and procedures. As additional compensation, the Servicer
may be entitled to receive for the related Collection Period some or all of
the portion, if any, of the Payment Amount for such Collection Period
remaining after payment of the Servicing Fee and interest and principal in
respect of the Securities and any required deposit to the Reserve Account.
See "Description of the Transfer and Servicing Agreements--Servicing
Compensation and Payment of Expenses" in the Prospectus and
"--Distributions" herein.
Distributions
Deposits to Collection Account. On or before each Payment Date,
the Servicer will cause all collections and other amounts constituting the
Payment Amount to be deposited into the Collection Account.
"Accounting Date" means, with respect to any Collection
Period, the last day of such Collection Period, and with respect
to any Payment Date, the last day of the Collection Period
preceding such Payment Date.
"APR" means, with respect to a Receivable, the rate per
annum of interest charged on the outstanding principal balance of
such Receivable.
"Available Funds" means, with respect to any
Determination Date, the sum of (i) the Collected Funds received by
the Servicer during the related Collection Period, (ii) all
Purchase Amounts deposited in the Collection Account since the
preceding Determination Date and on or before the related Deposit
Date, and (iii) all income received from investments of funds in
the Collection Account during the related Collection Period.
"Certificate Balance" equals, initially, $ and,
thereafter, equals the initial Certificate Balance, reduced by all
amounts allocable to principal previously distributed to
Certificateholders.
["Certificateholders' Interest Carryover Shortfall"
means, with respect to any Payment Date, the excess of the
Certificateholders' Monthly Interest Payment Amount for the
preceding Payment Date and any outstanding Certificateholders'
Interest Carryover Shortfall on such preceding Payment Date, over
the amount in respect of interest that is actually deposited in
the Certificate Distribution Account on such preceding Payment
Date, plus interest on such excess, to the extent permitted by
law, at the Certificate Rate from and including such preceding
Payment Date to but excluding the current Payment Date.]
"Certificateholders' Interest Payment Amount" means, for
any Payment Date, the sum of the Certificateholders' Monthly Interest
Payment Amount for such Payment Date and the Certificateholders'
Interest Carryover Shortfall for such Payment Date.
"Certificateholders' Monthly Interest Payment Amount"
means, for any Payment Date, the amount of interest accrued on the
Certificates at the Certificate Rate during the related Interest
Period (calculated on the basis of a 360-day year and twelve
30-day months).
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"Certificateholders' Percentage" means 100% minus the
Noteholders' Percentage.
"Certificateholders' Principal Payment Amount" means, for
any Payment Date, the sum of the Certificateholders' Monthly
Principal Payment Amount for such Payment Date and the
Certificateholders' Principal Carryover Shortfall as of the close
of the preceding Payment Date; provided that the Certificate
holders' Principal Payment Amount shall not exceed the Certificate
Balance. In addition, on the Certificate Final Scheduled Payment
Date, the principal required to be distributed to
Certificateholders will include the lesser of (a) any payments of
principal due and remaining unpaid on each Receivable owned by
Issuer as of ___________ or (b) the portion of the amount that is
necessary (after giving effect to the other amounts to be
deposited in the Certificate Distribution Account on such Payment
Date and allocable to principal) to reduce the Certificate Balance
to zero, in either case after giving effect to any required
distribution of the Noteholders' Principal Payment Amount to the
Note Distribution Account. In addition, on any Payment Date on
which, after giving effect to all distributions to Servicer, the
Noteholders and the Certificateholders on such Payment Date, (i)
the outstanding principal balance of the Notes is zero and (ii)
the amount on deposit in the Reserve Account is equal to or
greater than the Certificate Balance, Certificateholders'
Principal Payment Amount shall include an amount equal to such
Certificate Balance.
"Certificateholder's Monthly Principal Payment Amount"
means, for any Payment Date, the Certificateholders' Percentage of
the Principal Distribution Amount or, for any Payment Date on or
after the Payment Date on which the outstanding principal balance
of the Class A-2 Notes is reduced to zero, 100% of the Principal
Distribution Amount (less any amount required on the first such
Payment Date to reduce the outstanding principal balance of the
Class A-2 Notes to zero, which shall be deposited into the Note
Distribution Account).
"Certificateholders' Principal Carryover Shortfall"
means, as of the close of any Payment Date, the excess of the
Certificateholders' Monthly Principal Payment Amount and any
outstanding Certificateholders' Principal Carryover Shortfall from
the preceding Payment Date, over the amount in respect of
principal that is actually deposited in the Certificate
Distribution Account.
"Collected Funds" means, with respect to any
Determination Date, the amount of funds in the Collection Account
representing collections on the Receivables received by the
Servicer during the related Collection Period, including all
Liquidation Proceeds collected during the related Collection
Period (but excluding any Purchase Amounts) and all amounts paid
by Dealers under Dealer Agreements or Dealer Assignments with
respect to the Receivables during the related Collection Period.
"Liquidated Receivable" means, with respect to any
Collection Period, a Receivable as to which (i) the related
Financed Vehicle has been repossessed and sold by the Servicer, or
(ii) at least 10% of any scheduled payment has become 120 or more
days delinquent, or (iii) the Servicer has determined in good
faith that all amounts it expects to recover with respect thereto
have been received.
"Payment Amount" means, with respect to any Payment Date,
the sum of (i) the Available Funds as of the related Determination
Date, plus (ii) the Deficiency Claim Amount, if any, with respect
to such Payment Date.
"Principal Distribution Amount" without duplication, the
sum of: (i) the principal portion of all Collected Funds for the
related Determination Date (other than Collected Funds received
with respect to Liquidated Receivables following the respective
dates such Receivables became Liquidated Receivables), (ii) the
Principal Balance of all Receivables that became Liquidated
Receivables during the related Collection Period (other than
Purchased Receivables) as determined on the respective dates such
Receivables became Liquidated Receivables, and (iii) the principal
portion of the Purchase Amount of all Receivables that became
Purchased Receivables as of the related Accounting Date.
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"Purchase Amount" means for any Receivable, as of the
close of business on the last day of a Collection Period, the
amount of principal plus accrued interest calculated in accordance
with the Servicer's customary practices, for such Receivable as of
such day.
"Purchased Receivable" means a Receivable purchased as of
the close of business on the last day of a Collection Period by
the Servicer or repurchased by the Seller pursuant to the Sale and
Servicing Agreement.
Deposits to the Distribution Accounts. On each Payment Date,
Servicer shall instruct the Indenture Trustee or, in the event that the
Collection Account is maintained with an institution other than Indenture
Trustee, instruct and cause such institution (based on the information
contained in the Servicer's Report delivered on the related Determination
Date) to make, and Indenture Trustee or such other institution shall make,
the following deposits and distributions from the Collection Account for
deposit in the applicable account by 11:00 a.m. (New York time), to the
extent of the Payment Amount, in the following order of priority:
(a) to the Servicer, from the Payment Amount, the
Servicing Fee for the related Collection Period and all accrued
and unpaid Servicing Fees for prior Collection Periods;
(b) to the Note Distribution Account, from the Payment
Amount remaining after the application of clause (a), the
Noteholders' Interest Payment Amount;
(c) to the Note Distribution Account, from the Payment
Amount remaining after the application of clause (a) and (b), the
Noteholders' Principal Payment Amount;
(d) to Owner Trustee for deposit in the Certificate
Distribution Account, from the Payment Amount remaining after the
application of clauses (a) through (c), the Certificateholders'
Interest Payment Amount;
(e) to Owner Trustee for deposit in the Certificate
Distribution Account, from the Payment Amount remaining after the
application of clauses (a) through (d), the Certificateholders'
Principal Payment Amount;
(f) to the Reserve Account until the amount on deposit in
the Reserve Account equals the Reserve Account Required Amount; and
(g) to the Seller or the Servicer, any amounts remaining.
On each Determination Date (other than the first Determination
Date), the Servicer will provide the Owner Trustee and the Indenture
Trustee with certain information with respect to the Collection Period
related to the prior Payment Date, including the amount of aggregate
collections on the Receivables, the aggregate amount of Receivables which
were written off and the aggregate Purchase Amount of Receivables to be
repurchased by the Seller or to be purchased by the Servicer.
For purposes hereof, the following terms shall have the following
meanings:
"Noteholders' Distributable Amount" means, with respect
to any Payment Date, the sum of the Noteholders' Principal Payment
Amount and the Noteholders' Interest Payment Amount.
"Noteholders' Interest Carryover Shortfall" means, with
respect to any Payment Date, the excess of the Noteholders'
Monthly Interest Payment Amount for the preceding Payment Date and
any outstanding Noteholders' Interest Carryover Shortfall on such
preceding Payment Date, over the amount in respect of interest
that is actually deposited in the Note Distribution Account on
such preceding Payment Date, plus
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interest on the amount of interest due but not paid to Noteholders
on the preceding Payment Date, to the extent permitted by law, at
the respective Interest Rates borne by each class of Notes from
such preceding Payment Date through the current Payment Date.
"Noteholders' Interest Payment Amount" means, for any
Payment Date, the sum of the Noteholders' Monthly Interest Payment
Amount for such Payment Date and the Noteholders' Interest
Carryover Shortfall for such Payment Date.
"Noteholders' Monthly Interest Payment Amount" means, for
any Payment Date and for each class of Notes, the amount of
interest accrued on such class at its respective Interest Rate
during the related Interest Period (calculated on the basis of a
360-day year and twelve 30-day months).
"Noteholders' Monthly Principal Payment Amount" means, for
any Payment Date, the Noteholders' Percentage of the Principal
Distribution Amount.
"Noteholders' Percentage" means 100% until the point in
time at which Class A-1 Notes and Class A-2 Notes have been paid
in full and zero thereafter.
"Noteholders' Principal Carryover Shortfall" means, as of
the close of any Payment Date, the excess of the Noteholders'
Monthly Principal Payment Amount and any outstanding Noteholders'
Principal Carryover Shortfall from the preceding Payment Date over
the amount in respect of principal that is actually deposited in
the Note Distribution Account.
"Noteholders' Principal Payment Amount" means, for any
Payment Date, the sum of the Noteholder's Monthly Principal
Payment Amount for such Payment Date and the Noteholders'
Principal Carryover Shortfall as of the close of the preceding
Payment Date; provided that the Noteholders' Principal Payment
Amount shall not exceed the outstanding principal balance of the
Notes. In addition, on the Final Scheduled Payment Date of each
class of Notes, the principal required to be deposited in the Note
Distribution Account will include the amount necessary (after
giving effect to the other amounts to be deposited in the Note
Distribution Account on such Payment Date and allocable to
principal) to reduce the outstanding amount of such class of Notes
to zero.
On each Payment Date, all amounts on deposit in the Note
Distribution Account (other than investment earnings) will be paid in the
following order of priority:
(a) to the applicable Noteholders, accrued and unpaid
interest on the outstanding principal balance of the applicable
class of Notes at the applicable Interest Rate;
(b) the Noteholders' Principal Payment Amount in the
following order of priority:
(i) to the Holders of the Class A-1 Notes in
reduction of principal until the principal balance of the
Class A-1 Notes has been reduced to zero; and
(ii) to the Holders of the Class A-2 Notes in
reduction of principal until the principal balance of the
Class A-2 Notes has been reduced to zero.
On each Payment Date, all amounts on deposit in the Certificate
Distribution Account will be distributed to the Certificateholders in the
following priority:
(a) first, to the Certificateholders, on a pro rata
basis, an amount equal to the Certificateholders' Interest Payment
Amount; and
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(b) second, to the Certificateholders, on a pro rata
basis, an amount equal to the Certificateholders' Principal
Payment Amount.
Subordination of Certificateholders
The rights of the Certificateholders to receive distributions with
respect to the Receivables will be subordinated to the rights of the
Noteholders in the event of defaults and delinquencies on the Receivables
as provided in the Sale and Servicing Agreement. The protection afforded to
the Noteholders through subordination will be effected both by the
preferential right of the Noteholders to receive current distributions with
respect to the Receivables and by the establishment of the Reserve Account.
If on any Payment Date the entire Noteholders' Interest Payment Amount for
such Payment Date (after giving effect to any amounts withdrawn from the
Reserve Account) is not deposited in the Note Distribution Account, the
Certificateholders will not receive any distributions.
The subordination of the Certificates and the Reserve Account are
intended to enhance the likelihood of receipt by Noteholders of the full
amount of principal and interest due them and to decrease the likelihood
that the Noteholders will experience losses. In addition, the Reserve
Account is intended to enhance the likelihood of receipt by
Certificateholders of the full amount of principal and interest due them
and to decrease the likelihood that the Certificateholders will experience
losses. However, in certain circumstances, the Reserve Account could be
depleted. If the amount required to be withdrawn from the Reserve Account
to cover shortfalls in collections on the Receivables exceeds the amount of
available cash in the Reserve Account, Noteholders or Certificateholders
could incur losses or a temporary shortfall in the amounts distributed to
the Noteholders or the Certificateholders could result, which could, in
turn, increase the average life of the Notes or the Certificates.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
Information regarding certain legal aspects of the Receivables is
set forth under "Certain Legal Aspects of the Receivables" in the
Prospectus.
LEGAL INVESTMENT
[The Class A-1 Notes will be eligible for purchase by money market
funds under paragraph (a) (10) of Rule 2a-7 under the Investment Company
Act of 1940, as amended.]
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material federal income tax
consequences of the purchase, ownership and disposition of the Notes and
the Certificates and such summary represents the opinion of Federal Tax
Counsel subject to the qualifications set forth herein. An opinion of
Federal Tax Counsel, however, is not binding on the Internal Revenue
Service ("IRS") or the courts. No ruling on any of the issues discussed
below will be sought from the IRS. The following summary is intended as a
discussion of the possible effects of certain federal income tax
consequences to holders, but does not purport to furnish information in the
level of detail or with the attention to a holder's specific tax
circumstances that would be provided by a holder's own tax advisor. For
example, it does not discuss the tax consequences of the purchase,
ownership and disposition of the Notes and Certificates by Noteholders or
Certificateholders that are subject to special treatment under the federal
income tax laws (including banks and thrifts, insurance companies,
regulated investment companies, dealers in securities, foreign investors,
trusts and estates and pass-through entities, the equity holders of which
are any of the foregoing). In addition, the discussion regarding the Notes
is limited to the federal income tax consequences of the initial
Noteholders and not a purchaser in the secondary market. Moreover, there
are no cases or IRS rulings on similar transactions involving both debt and
equity interests issued by a trust with terms similar to those of the Notes
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and the Certificates. As a result, the IRS may disagree with all or a part of
the discussion below. We suggest that prospective investors consult their own
tax advisors in determining the federal, state, local, foreign and any other
tax consequences to them of the purchase, ownership and disposition of the
Notes and the Certificates.
The following summary is based upon current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the Treasury
regulations promulgated thereunder and judicial or ruling authority, all of
which are subject to change, which change may be retroactive.
Scope of the Tax Opinions
In the opinion of Federal Tax Counsel, the Trust will not be
classified as a separate entity that is an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes.
Further, with respect to the Notes, Federal Tax Counsel is of the opinion
that the Notes will be characterized as debt for federal income tax
purposes.
In addition, Federal Tax Counsel has prepared or reviewed the
statements under the heading "Summary of Terms--Tax Status" as they relate
to federal income tax matters and under the heading "Material Federal
Income Tax Consequences" herein and in the Prospectus and is of the opinion
that such statements are a fair and accurate discussion of all material
federal income tax consequences of the purchase, ownership and disposition
of the Notes and Certificates. Such statements are intended as a discussion
of the possible effects of the classification of the Trust as a partnership
for federal income tax purposes on investors and of related tax matters
affecting investors generally, but do not purport to furnish information in
the level of detail or with the attention to the investor's specific tax
circumstances that would be provided by an investor's own tax adviser.
Accordingly, we suggest that investors consult their own tax advisers with
regard to the tax consequences of investing in the Notes and the
Certificates.
Tax Classification of the Trust as a Partnership
Federal Tax Counsel is of the opinion that the Trust (which the
Trust Agreement specifies is intended to be treated as a partnership) will
not be classified as a separate entity that is an association (or publicly
traded partnership) taxable as a corporation for federal income tax
purposes. A copy of such opinion of Federal Tax Counsel will be filed with
the Commission as an exhibit to a Form 8-K prior to the confirmation of
sales of any series of Securities. This opinion is based on the assumption
that the terms of the Trust Agreement and related documents will be
complied with, and on Federal Tax Counsel's conclusion that the nature of
the income of the Trust will exempt it from the rule that certain publicly
traded partnerships are taxable as corporations.
If the Trust were taxable as a corporation for federal income tax
purposes, the Trust would be subject to corporate income tax on its taxable
income. The Trust's taxable income would include all its income on the
Receivables, reduced by its interest expense on the Notes provided the
Notes are respected as debt for federal income tax purposes (see discussion
in the following paragraph). Any such corporate income tax could materially
reduce cash available to make payments on the Notes and distributions on
the Certificates, and Certificateholders could be liable for any such tax
that is unpaid by the Trust.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Seller will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes
as debt for federal, state and local income and franchise tax purposes. In
the opinion of Federal Tax Counsel, the Notes will be characterized as debt
for federal income tax purposes. A copy of such opinion of Federal Tax
Counsel will be filed with the Commission with a Form 8-K following the
issuance of the Notes. The discussion below assumes this characterization
of the Notes is correct.
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The discussion below assumes that all payments on the Notes are
denominated in U.S. dollars, and that the Notes are not Strip Notes.
Moreover, the discussion assumes that the interest formula for the Notes
meets the requirements for "qualified stated interest" under Treasury
regulations (the "OID regulations") relating to original issue discount
("OID"), and that any OID on the Notes (i.e., any excess of the principal
amount of the Notes over their issue price) does not exceed a de minimis
amount (i.e., 1/4% of their principal amount multiplied by the number of full
years included in their term), all within the meaning of the OID regulations.
Interest Income on the Notes. Based on the above assumptions,
except as discussed in the following paragraph, the Notes will not be
considered issued with OID. The stated interest thereon will be taxable to
a Noteholder as ordinary interest income when received or accrued in
accordance with such Noteholder's method of tax accounting. Under the OID
regulations, a holder of a Note issued with a de minimis amount of OID must
include such OID in income, on a pro rata basis, as principal payments are
made on the Note. It is believed that any prepayment premium paid as a
result of a mandatory redemption will be taxable as contingent interest
when it becomes fixed and unconditionally payable. A purchaser who buys a
Note for more or less than its principal amount will generally be subject,
respectively, to the premium amortization or market discount rules of the
Code.
Sale or Other Disposition. If a Noteholder sells a Note, the
holder will recognize gain or loss in an amount equal to the difference
between the amount realized on the sale and the holder's adjusted tax basis
in the Note. The adjusted tax basis of a Note to a particular Noteholder
will equal the holder's cost for the Note, increased by any market
discount, OID and gain previously included by such Noteholder in income
with respect to the Note and decreased by the amount of bond premium (if
any) previously amortized and by the amount of principal payments
previously received by such Noteholder with respect to such Note. Any such
gain or loss will be capital gain or loss if the Note was held as a capital
asset, except for gain representing accrued interest and accrued market
discount not previously included in income. Capital losses may be used by a
corporate taxpayer only to offset capital gains, and by an individual
taxpayer only to the extent of capital gains plus $3,000 of other income.
Foreign Holders. Interest payments made (or accrued) to a
Noteholder who is a nonresident alien, foreign corporation or other
non-United States person (a "foreign person") generally will be considered
"portfolio interest", and generally will not be subject to United States
federal income tax and withholding tax, if the interest is not effectively
connected with the conduct of a trade or business within the United States by
the foreign person and the foreign person (i) is not actually or
constructively a "10 percent shareholder" of the Trust or the Seller
(including a holder of 10% of the outstanding Certificates) or a "controlled
foreign corporation" with respect to which the Trust or the Seller is a
"related person" within the meaning of the Code and (ii) provides the Trustee
or other person who is otherwise required to withhold U.S. tax with respect
to the Notes with an appropriate statement (on IRS Form W-8 or a similar
form), signed under penalties of perjury, certifying that the beneficial
owner of the Note is a foreign person and providing the foreign person's name
and address. If a Note is held through a securities clearing organization or
certain other financial institutions, the organization or institution may
provide the relevant signed statement to the withholding agent; in that case,
however, the signed statement must be accompanied by a Form W-8 or substitute
form provided by the foreign person that owns the Note. If such interest is
not portfolio interest, then it will be subject to United States federal
withholding tax at a rate of 30 percent, unless that rate is reduced or
eliminated pursuant to an applicable tax treaty and the foreign person
provides the trustee or other payor of the interest with a copy of IRS Form
1001, or if the interest is effectively connected with the conduct of a U.S.
trade or business and the foreign person provides a copy of IRS Form 4224.
Any capital gain realized on the sale, redemption, retirement or
other taxable disposition of a Note by a foreign person will be exempt from
United States federal income and withholding tax, provided that (i) such
gain is not effectively connected with the conduct of a trade or business
in the United States by the foreign person and (ii) in the case of an
individual foreign person, the foreign person is not present in the United
States for 183 days or more in the taxable year.
On October 6, 1997, final Treasury regulations (the "Withholding
Tax Regulations") were issued that modify certain of the filing
requirements with which foreign persons must comply in order to be entitled
to an exemption from U.S. withholding tax or a reduction to the applicable
U.S. withholding tax rate. Those persons currently required to file Form
W-8 generally will continue to be required to file that form. However, the
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requirement that foreign persons submit Form W-8 is extended to most
foreign persons who wish to seek an exemption from withholding tax on the
basis that income from the Certificates is effectively connected with the
conduct of a U.S. trade or business (in lieu of Form 4224) and to foreign
persons wishing to rely on a tax treaty to reduce the withholding tax rate
(in lieu of Form 1001). The Withholding Tax Regulations are effective for
payments of interest due after December 31, 1999, but Forms 4224 and 1001
filed prior to that date will continue to be effective until the earlier of
December 31, 2000 or the current expiration date of those forms. We suggest
that prospective investors consult their tax advisors with respect to the
effect of the Withholding Tax Regulations.
Backup Withholding. Each holder of a Note (other than an exempt
holder such as a corporation, tax exempt organization, qualified pension
and profit sharing trust, individual retirement account or nonresident
alien who provides certification as to status as a nonresident) will be
required to provide, under penalties of perjury, a certificate containing
the holder's name, address, correct federal taxpayer identification number
and a statement that the holder is not subject to backup withholding.
Should a nonexempt Noteholder fail to provide the required certification,
the Trust will be required to withhold 31 percent of the amount otherwise
payable to the holder, and remit the withheld amount to the IRS as a credit
against the holder's federal income tax liability. We suggest that
Noteholders consult with their tax advisors as to their eligibility for
exemption from backup withholding and the procedure for obtaining the
exemption, and the potential impact of the Withholding Tax Regulations.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of Federal Tax Counsel, the IRS successfully asserted that one or
more of the Notes did not represent debt for federal income tax purposes,
the Notes might be treated as equity interests in the Trust. If so treated,
the Trust might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to reduce
its taxable income by deductions for interest expense on Notes
recharacterized as equity). Alternatively, and most likely in the view of
Federal Tax Counsel, the Trust might be treated as a publicly traded
partnership that would not be taxable as a corporation because it would
meet certain qualifying income tests. Nonetheless, treatment of the Notes
as equity interests in such a publicly traded partnership could have
adverse tax consequences to certain holders. For example, income to certain
tax-exempt entities (including pension funds) would be "unrelated business
taxable income", income to foreign holders generally would be subject to
U.S. tax and U.S. tax return filing and withholding requirements, and
individual holders might be subject to certain limitations on their ability
to deduct their share of Trust expenses. Furthermore, such a
characterization could subject holders to state and local taxation in
jurisdictions in which they are not currently subject to tax.
Tax Consequences to Holders of the Certificates
Treatment of the Trust as a Partnership. The Seller, the Servicer,
the Trustee, and the Certificateholders, by their purchase of Certificates,
will agree to treat the Trust as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by
the Trust, the partners of the partnership being the Certificateholders,
and the Notes being debt of the partnership. However, the proper
characterization of the arrangement involving the Trust, the Certificates,
the Notes, the Seller, and the Servicer is not clear because there is no
authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For
example, because the Certificates have certain features characteristic of
debt, the Certificates might be considered debt of the Seller or the Trust.
Any such characterization would not result in materially adverse tax
consequences to Certificateholders as compared to the intended consequences
from treatment of the Certificates as equity in a partnership, described
below. The following discussion assumes that the Certificates represent
equity interests in a partnership.
The following discussion assumes that all payments on the
Certificates are denominated in U.S. dollars, none of the Certificates are
Strip Certificates, and that a series of Securities includes a single class
of Certificates.
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Partnership Taxation. As a partnership, the Trust will not be
subject to federal income tax. Rather, each Certificateholder will be
required to separately take into account such holder's accruals of
guaranteed payments from the Trust and its allocated share of other income,
gains, losses, deductions and credits of the Trust. The Trust's income will
consist primarily of interest and finance charges earned on the Receivables
(including appropriate adjustments for market discount, OID and bond
premium) and any gain upon collection or disposition of Receivables. The
Trust's deductions will consist primarily of interest accruing with respect
to the Notes, guaranteed payments on the Certificates, servicing and other
fees, and losses or deductions upon collection or disposition of
Receivables.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership
agreement (here, the Trust Agreement and related documents). Under the
Trust Agreement, interest payments on the Certificates at the Certificate
Rate (including interest on amounts previously due on the Certificates but
not yet distributed) will be treated as "guaranteed payments" under Section
707(c) of the Code. Guaranteed payments are payments to partners for the
use of their capital and, in the present circumstances, are treated as
deductible to the Trust and ordinary income to the Certificateholders. The
Trust will have a calendar year tax year and will deduct the guaranteed
payments under the accrual method of accounting. Certificateholders with a
calendar year tax year are required to include the accruals of guaranteed
payments in income in their taxable year that corresponds to the year in
which the Trust deducts the payments, and Certificateholders with a
different taxable year are required to include the payments in income in
their taxable year that includes the December 31 of the Trust year in which
the Trust deducts the payments. It is possible that guaranteed payments
will not be treated as interest for all purposes of the Code.
In addition, the Trust Agreement will provide, in general, that
the Certificateholders will be allocated taxable income of the Trust for
each Collection Period equal to the sum of (i) any Trust income
attributable to discount on the Receivables that corresponds to any excess
of the principal amount of the Certificates over their initial issue price,
(ii) prepayment premium, if any, payable to the Certificateholders for such
month and (iii) any other amounts of income payable to the
Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust of premium on Receivables that corresponds to any
excess of the issue price of Certificates over their principal amount. All
remaining items of taxable income, gain, loss and deduction of the Trust,
if any, will be allocated to the Seller.
Based on the economic arrangement of the parties, this approach
for allocating Trust income arguably should be permissible under applicable
Treasury regulations, although no assurance can be given that the IRS would
not require a greater amount of income to be allocated to
Certificateholders. Moreover, even under the foregoing method of
allocation, Certificateholders may be allocated income equal to the entire
Certificate Rate plus the other items described above even though the Trust
might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders would, in effect, be required to report
income from the Certificates on the accrual basis and Certificateholders
may become liable for taxes on Trust income even if they have not received
cash from the Trust to pay such taxes. In addition, because tax allocations
and tax reporting will be done on a uniform basis for all
Certificateholders but Certificateholders may be purchasing Certificates at
different times and at different prices, Certificateholders may be required
to report on their tax returns taxable income that is greater or less than
the amount reported to them by the Trust.
All of the guaranteed payments and taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit
plan or other tax-exempt entity (including an individual retirement
account) will constitute "unrelated business taxable income" generally
taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust (including
fees to the Servicer but not interest expense) would be miscellaneous
itemized deductions. Such deductions might be disallowed to the individual
in whole or in part and might result in such holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to
such holder over the life of the Trust. It is not clear whether these rules
would be applicable to a Certificateholder accruing guaranteed payments.
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The Trust intends to make all tax calculations relating to income
and allocations to Certificateholders on an aggregate basis. If the IRS
were to require that such calculations be made separately for each
Receivable, the Trust might be required to incur additional expense but it
is believed that there would not be a material adverse effect on
Certificateholders.
Discount and Premium. It is believed that the Receivables were not
issued with OID, and, therefore, the Trust should not have OID income.
However, the purchase price paid by the Trust for the Receivables may be
greater or less than the remaining principal balance of the Receivables at
the time of purchase. If so, the Receivables will have been acquired at a
premium or discount, as the case may be. (As indicated above, the Trust
will make this calculation on an aggregate basis, but might be required to
recompute it on a Receivable-by- Receivable basis.)
If the Trust acquires the Receivables at a market discount or
premium, the Trust will elect to include any such discount in income
currently as it accrues over the life of the Receivables or to offset any
such premium against interest income on the Receivables. As indicated
above, a portion of such market discount income or premium deduction may be
allocated to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust
will be deemed to terminate for federal income tax purposes if 50% or more
of the capital and profits interests in the Trust are sold or exchanged
within a 12-month period. If such a termination occurs, under current
Treasury regulations the Trust will be deemed to contribute all of its
assets and liabilities to a new partnership in exchange for an interest in
the new partnership; and, immediately thereafter, the terminated
partnership will be deemed to have distributed interests in the new
partnership to the new and remaining partners in liquidation of the old
partnership. The Trust will not comply with certain technical requirements
that might apply when such a constructive termination occurs. As a result,
the Trust may be subject to certain tax penalties and may incur additional
expenses if it is required to comply with those requirements. Furthermore,
the Trust might not be able to comply due to lack of data.
Disposition of Certificates. Subject to the discussion in the
immediately following paragraph, generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates
sold. A Certificateholder's tax basis in a Certificate will generally equal
the holder's cost increased by the holder's share of Trust income
(includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the
Certificates and the amount realized on a sale of a Certificate would
include the holder's share of the Notes and other liabilities of the Trust.
A holder acquiring Certificates at different prices may be required to
maintain a single aggregate adjusted tax basis in such Certificates, and,
upon sale or other disposition of some of the Certificates, allocate a
portion of such aggregate tax basis to the Certificates sold (rather than
maintaining a separate tax basis in each Certificate for purposes of
computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Receivables would
generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Trust does not expect to have
any other assets that would give rise to such special reporting
requirements. Thus, to avoid those special reporting requirements, the
Trust will elect to include market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate
amount of income (not including income attributable to disallowed itemized
deductions described above) over the life of the Certificates that exceeds
the aggregate cash distributions with respect thereto, such excess will
generally give rise to a capital loss upon the retirement of the
Certificates.
Allocations Between Transferors and Transferees. In general, the
Trust's taxable income and losses will be determined monthly and the tax
items for a particular calendar month will be apportioned among the
Certificateholders in proportion to the principal amount of Certificates
owned by them as of the close of the last day
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of such month. As a result, a holder purchasing Certificates may be
allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual purchase.
The use of such a monthly convention may not be permitted by
existing Treasury regulations. If a monthly convention is not allowed (or
only applies to transfers of less than all of the partner's interest),
taxable income or losses of the Trust might be reallocated among the
Certificateholders. The Seller is authorized to revise the Trust's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells
its Certificates at a profit (loss), the purchasing Certificateholder will
have a higher (lower) basis in the Certificates than the selling
Certificateholder had. The tax basis of the Trust's assets will not be
adjusted to reflect that higher (or lower) basis unless the Trust were to
file an election under Section 754 of the Code. In order to avoid the
administrative complexities that would be involved in keeping accurate
accounting records, as well as potentially onerous information reporting
requirements, the Trust will not make such election. As a result,
Certificateholders might be allocated a greater or lesser amount of Trust
income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. The Trustee is required to keep or have
kept complete and accurate books of the Trust. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and
the fiscal year of the Trust will be the calendar year. The Trust will file
a partnership information return (IRS Form 1065) with the IRS for each
taxable year of the Trust and will report each Certificateholder's
allocable share of items of Trust income and expense to holders and the IRS
on Schedule K-1. The Trust will provide the Schedule K-1 information to
nominees that fail to provide the Trust with the information statement
described below and such nominees will be required to forward such
information to the beneficial owners of the Certificates. Holders must file
tax returns that are consistent with the information return filed by the
Trust or be subject to penalties unless the holder notifies the IRS of all
such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates
as a nominee at any time during a calendar year is required to furnish the
Trust with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes
(i) the name, address and taxpayer identification number of the nominee and
(ii) as to each beneficial owner (x) the name, address and identification
number of such person, (y) whether such person is a United States person, a
tax-exempt entity or a foreign government, an international organization,
or any wholly-owned agency or instrumentality of either of the foregoing,
and (z) certain information on Certificates that were held, bought or sold
on behalf of such person throughout the year. In addition, brokers and
financial institutions that hold Certificates through a nominee are
required to furnish directly to the Trust information as to themselves and
their ownership of Certificates. A clearing agency registered under Section
17A of the Exchange Act is not required to furnish any such information
statement to the Trust. The information referred to above for any calendar
year must be furnished to the Trust on or before the following January 31.
Nominees, brokers and financial institutions that fail to provide the Trust
with the information described above may be subject to penalties.
The Seller will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing
the Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may
be precluded from separately litigating a proposed adjustment to the items of
the Trust. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the
income and losses of the Trust.
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<PAGE>
Tax Consequences to Foreign Certificateholders. It is not clear
whether the Trust would be considered to be engaged in a trade or business
in the United States for purposes of federal withholding taxes with respect
to non- U.S. persons because there is no clear authority dealing with that
issue under facts substantially similar to those described herein. Although
it is not expected that the Trust would be engaged in a trade or business
in the United States for such purposes, the Trust will withhold as if it
were so engaged in order to protect the Trust from possible adverse
consequences of a failure to withhold. The Trust expects to withhold on the
portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income
were effectively connected to a U.S. trade or business, at a rate of 35%
for foreign holders that are taxable as corporations and 39.6% for all
other foreign holders. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the Trust to
change its withholding procedures. In determining a Certificateholder's
withholding status, the Trust may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of
perjury.
Each foreign Certificateholder might be required to file a U.S.
individual or corporate income tax return and pay U.S. income tax on the
amount computed therein (including, in the case of a corporation, the
branch profits tax) on its share of accruals of guaranteed payments and the
Trust's income. Each foreign Certificateholder must obtain a taxpayer
identification number from the IRS and submit that number to the Trust on
Form W-8 in order to assure appropriate crediting of the taxes withheld. A
foreign Certificateholder generally would be entitled to file with the IRS
a claim for refund with respect to taxes withheld by the Trust, taking the
position that no taxes were due because the Trust was not engaged in a U.S.
trade or business. However, the IRS may assert additional taxes are due,
and no assurance can be given as to the appropriate amount of tax
liability.
The Withholding Tax Regulations modify certain of the filing
requirements with which foreign persons must comply in order to be entitled
to an exemption from U.S. withholding tax or a reduction to the applicable
U.S. withholding tax rate. Those persons currently required to file Form
W-8 generally will continue to be required to file that form. However, the
requirement that foreign persons submit Form W-8 is extended to most
foreign persons who wish to seek an exemption from withholding tax on the
basis that income from the Certificates is effectively connected with the
conduct of a U.S. trade or business (in lieu of Form 4224) and to foreign
persons wishing to rely on a tax treaty to reduce the withholding tax rate
(in lieu of Form 1001). The Withholding Tax Regulations are effective for
payments of interest due after December 31, 1999, but Forms 4224 and 1001
filed prior to that date will continue to be effective until the earlier of
December 31, 2000 or the current expiration date of those forms. We suggest
that prospective investors consult their tax advisors with respect to the
effect of the Withholding Tax Regulations.
Backup Withholding. Distributions made on the Certificates and
proceeds from the sale of the Certificates will be subject to a "backup"
withholding tax of 31% if, in general, the Certificateholder fails to
comply with certain identification procedures, unless the holder is an
exempt recipient under applicable provisions of the Code. We suggest that
Certificateholders consult with their tax advisors as to their eligibility
for exemption to backup withholding, the procedure for obtaining the
exemption, and the potential impact of the Withholding Tax Regulations.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Material Federal Income Tax Consequences" above, we suggest that potential
purchasers consider the state income tax consequences of the acquisition,
ownership and disposition of the Notes. State income tax law may vary
substantially from state to state, and this discussion does not purport to
describe any aspect of the income tax laws of any state. Therefore, we
suggest that potential purchasers consult their own tax advisors with
respect to the various tax consequences of an investment in the Notes.
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<PAGE>
ERISA CONSIDERATIONS
The Notes
The Notes may be purchased by an employee benefit plan or an
individual retirement account (a "Plan") subject to ERISA or Section 4975
of the Code. A fiduciary of a Plan must determine that the purchase of a
Note is consistent with its fiduciary duties under ERISA and does not
result in the assets of the Trust being deemed to constitute plan assets or
in a nonexempt prohibited transaction as defined in Section 406 of ERISA or
Section 4975 of the Code. For additional information regarding the partial
prohibited transactions and exemptions that may be available and the ERISA
principles regarding debt, see "ERISA Considerations" in the Prospectus.
Although there is little guidance on the subject, the Seller
believes that, at the time of their issuance, the Notes should be treated
as an instrument without substantial equity features for purposes of the
Plan Asset Regulation. The debt status of the Notes could be affected,
after their initial issuance, by certain changes in the financial condition
of the trust.
By its acceptance of a Note, each Noteholder shall be deemed to
have represented and warranted that its purchase and holding of the Note
will not result in a nonexempt prohibited transaction under Section 406(a)
of ERISA or Section 4975 of the Code.
[The Certificates
The Certificates may not be acquired (a) with the assets of an
employee benefit plan (as defined in Section 3(3) of ERISA) that is subject
to the provisions of Title I of ERISA, (b) by a plan described in Section
4975(e) (1) of the Code or (c) by any entity whose underlying assets
include plan assets by reason of a plan's investment in the entity or which
uses plan assets to acquire Certificates. By its acceptance of a
Certificate, each Certificateholder will be deemed to have represented and
warranted that it is not subject to the foregoing limitation. In this
regard, we suggest that purchasers that are insurance companies consult
with their counsel with respect to the United States Supreme Court case
interpreting the fiduciary responsibility rules of ERISA, John Hancock
Mutual Life Insurance Co. v. Harris Trust and Savings Bank (decided
December 13, 1993). In John Hancock, the Supreme Court ruled that assets
held in an insurance company's general account may be deemed to be "plan
assets" for ERISA purposes under certain circumstances. Prospective
purchasers should determine whether the decision affects their ability to
make purchases of the Certificates. For additional information regarding
treatment of the Certificates under ERISA, see "ERISA Considerations" in
the Prospectus.]
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<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement, the Seller has agreed to cause the Trust to sell to each of the
underwriters listed below (each, an "Underwriter"), and each of the
Underwriters has agreed to purchase, the principal amount of the Securities
set forth opposite its name below. Under the terms and conditions of the
Underwriting Agreement, each of the Underwriters is obligated to take and
pay for all of the Securities if any are taken.
Principal Amount of Principal Amount [Principal Amount
Class A-1 of Class A-2 of Asset-Backed
Asset-Backed Notes Asset-Backed Notes Certificates]
------------------ ------------------ -----------------
______________ $_________________ $_________________ $________________
______________ __________________ __________________ _________________
______________ __________________ __________________ _________________
Total: $ $ $
================= ================= ================
The Seller has been advised by the Underwriters that they propose
initially to offer the Securities to the public at the prices set forth
herein, and to certain dealers at such prices less the initial concession
not in excess of ____% per Class A-1 Note; _____% per Class A-2 Note; and
_____% per Certificate. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of __% of the principal amount of the
Securities to certain other dealers. After the initial public offering, the
public offering price and such concessions may be changed.
The Seller does not intend to apply for listing of the Notes [or
the Certificates] on a national securities exchange, but has been advised
by the Underwriters that they intend to make a market in the Notes [and
Certificates]. The Underwriters are not obligated, however, to make a
market in the Notes [and the Certificates] and may discontinue market
making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the Notes [or the Certificates].
In connection with this offering, the underwriters may over-allot
or effect transactions which stabilize or maintain the market prices of the
Notes [and the Certificates] at levels above those which might otherwise
prevail in the open market. Such stabilizing, if commenced, may be
discontinued at any time.
The Seller and Paragon have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended.
In the ordinary course of their respective businesses, each
Underwriter and its affiliates have engaged and may in the future engage in
commercial banking and investment banking transactions with the Seller.
LEGAL OPINIONS
In addition to the legal opinions described in the Prospectus,
certain legal matters relating to the Notes and the Certificates and
certain federal income tax and other matters will be passed upon for the
Trust by Mayer, Brown & Platt. Certain legal matters will be passed upon
for the Underwriters by __________________, _______________,
_______________. Mayer, Brown & Platt may from time to time render legal
services to the Seller, the Servicer and its affiliates.
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<PAGE>
INDEX OF DEFINED TERMS
|| Page
Accounting Date ......................................................S-27
Aggregate Principal Balance..............................................S-5
Amount Financed .......................................................S-5
Available Funds ......................................................S-27
Business Day .......................................................S-6
Certificate Balance.....................................................S-27
Certificate Final Scheduled Payment Date.................................S-8
Certificate Rate .......................................................S-7
Certificateholder's Monthly Principal Payment Amount....................S-28
Certificateholders.......................................................S-7
Certificateholders' Interest Carryover Shortfall........................S-27
Certificateholders' Interest Payment Amount.............................S-28
Certificateholders' Monthly Interest Payment Amount.....................S-28
Certificateholders' Principal Carryover Shortfall.......................S-28
Certificateholders' Principal Payment Amount............................S-28
Certificates .......................................................S-1
Class A-1 Final Scheduled Payment Date...................................S-6
Class A-1 Interest Rate..................................................S-6
Class A-1 Notes .......................................................S-1
Class A-2 Final Scheduled Payment Date...................................S-6
Class A-2 Interest Rate..................................................S-6
Class A-2 Notes .......................................................S-1
Closing Date .......................................................S-4
Code ......................................................S-10
Collected Funds ......................................................S-28
Collection Period .......................................................S-6
Commission .......................................................S-3
Contract Rate ......................................................S-27
CTS ......................................................S-22
Cutoff Date .......................................................S-5
Defaulted Receivable....................................................S-28
Deficiency Claim Amount.................................................S-26
Determination Date......................................................S-23
Distribution Date .......................................................S-6
ERISA ......................................................S-10
Final Scheduled Payment Date.............................................S-5
Financed Vehicles .......................................................S-5
Floor Amount ......................................................S-26
Foreign person ......................................................S-33
Indenture .......................................................S-4
Indenture Trustee .......................................................S-4
Initial Principal Balance................................................S-7
Interest Accrual Period..................................................S-6
Interest Period .......................................................S-6
Interest Rates .......................................................S-6
IRS ......................................................S-32
Issuer .......................................................S-4
Liquidated Receivable...................................................S-28
Liquidation Proceeds....................................................S-26
Noteholders .......................................................S-6
Noteholders' Distributable Amount.......................................S-30
Noteholders' Interest Carryover Shortfall...............................S-30
S-41
<PAGE>
Noteholders' Interest Payment Amount....................................S-30
Noteholders' Monthly Principal Payment Amount...........................S-30
Noteholders' Percentage.................................................S-30
Noteholders' Principal Carryover Shortfall..............................S-30
Noteholders' Principal Payment Amount...................................S-30
Notes .......................................................S-4
OID ......................................................S-33
OID regulations ......................................................S-33
Owner Trustee .......................................................S-4
Payment Amount ......................................................S-28
Payment Date .......................................................S-2
Plan ......................................................S-39
Portfolio interest......................................................S-33
Principal Balance .......................................................S-5
Principal Distribution Amount...........................................S-29
Prospectus .......................................................S-1
Purchase Amount ......................................................S-29
Purchased Receivable....................................................S-29
Qualified stated interest...............................................S-33
Rating Agency ......................................................S-10
Receivables Pool ......................................................S-14
Record Date .......................................................S-6
Related Documents ......................................................S-11
Reserve Account .......................................................S-9
Reserve Account Deposit..................................................S-9
Reserve Account Required Amount.........................................S-25
Sale and Servicing Agreement.............................................S-4
Securities .......................................................S-4
Securityholders .......................................................S-7
Seller .......................................................S-4
Servicer .......................................................S-2
Supplemental Servicing Fee..............................................S-27
Triumph ......................................................S-22
Trust .......................................................S-4
Trust Agreement .......................................................S-4
Trust Property .......................................................S-4
Underwriter ......................................................S-40
||
S-42
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the
Seller or the Underwriters. This Prospectus Supplement and the Prospectus
do not constitute an offer of any securities other than those to which they
relate or an offer to sell, or a solicitation of an offer to buy, to any
person in any jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus Supplement and the
Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that the information contained herein is correct as
of any time subsequent to their respective dates.
---------------------------
TABLE OF CONTENTS
Prospectus Supplement
Page
----
Reports to [Note][Security] holders........... S-3
Summary of Terms.............................. S-4
Risk Factors.................................. S-12
The Trust..................................... S-14
The Receivables Pool.......................... S-15
The Seller, the Servicer and Paragon.......... S-24
Weighted Average Life of the Securities....... S-24
Description of the Notes...................... S-25
Description of the Certificates............... S-26
Description of the Transfer and Servicing
Agreements.................................. S-27
Certain Legal Aspects of the Receivables...... S-33
Legal Investment.............................. S-33
Material Federal Income Tax Consequences...... S-33
State Tax Consequences........................ S-41
ERISA Considerations.......................... S-41
Underwriting.................................. S-42
Legal Opinions................................ S-42
Index of Defined Terms........................ S-44
Prospectus
Page
----
Available Information.........................
Incorporation of Certain Documents
by Reference................................
Summary of Terms..............................
Risk Factors..................................
The Trusts....................................
The Receivables Pools.........................
Weighted Average Life of the Securities.......
Pool Factors and Trading Information..........
Use of Proceeds...............................
The Seller....................................
Paragon.......................................
Description of the Notes......................
Description of the Certificates...............
Certain Information Regarding the
Securities..................................
Description of the Transfer and Servicing
Agreements
Certain Legal Aspects of the Receivables......
Material Federal Income Tax Consequences......
Certain State Tax Consequences................
ERISA Considerations..........................
Plan of Distribution..........................
Legal Opinions................................
Index of Defined Terms........................
<PAGE>
==============================================
PARAGON AUTO RECEIVABLES
CORPORATION
(Seller)
$_____________________
Class A-1 ____%
Asset Backed Notes
$_____________________
Class A-2 ____%
Asset Backed Notes
[$____________________
_____%
Asset Backed Certificates]
=========================
PROSPECTUS SUPPLEMENT
____________, _______
=========================
==============================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the securities being offered hereunder
other than underwriting discounts and commissions.
Registration Fee............................................$111,217
"Blue Sky" Registration Fees................................ 10,000
Printing and Engraving Expenses............................. 50,000
Trustee Fees and Expenses................................... 40,000
Legal Fees and Expenses..................................... 150,000
Accountants' Fees and Expenses.............................. 100,000
Rating Agency Fees.......................................... 160,000
Miscellaneous............................................... 28,783
---------
Total.......................................$650,000
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) The Delaware General Corporation Law (Section 145) gives Delaware
corporations broad powers to indemnify their present and former directors
and officers and those of affiliated corporations against expenses incurred
in the defense of any lawsuit to which they are made parties by reason of
being or having been such directors or officers, subject to specified
conditions and exclusions, gives a director or officer who successfully
defends an action the right to be so indemnified, and authorizes the
registrant to buy directors' and officers' liability insurance. Such
indemnification is not exclusive of any other rights to which those
indemnified may be entitled under any bylaws, agreement, vote of
stockholders or otherwise.
(b) Article IX of the Certificate of Incorporation of the registrant
permits, and Article XII of the Bylaws of the registrant provides for,
indemnification of directors, officers, employees and agents to the fullest
extent permitted by law.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS
(a) All financial statements, schedules and historical financial
information have been omitted as they are not applicable.
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of Paragon Auto Receivables
Corporation*
3.2 By-Laws of Paragon Auto Receivables Corporation*
3.3 Form of Certificate of Trust for Paragon Auto Receivables Trusts
(included in Exhibit 4.2).*
4.1 Form of Indenture between the Trust and the Indenture Trustee
(including forms of Notes).*
4.2 Form of Trust Agreement between the Registrant and the Trustee
(including forms of Certificates).*
4.3 Form of Pooling and Servicing Agreement between the
Registrant, the Servicer and the Trustee (including forms of
Certificates).*
5.1 Opinion of Mayer, Brown & Platt with respect to legality.*
8.1 Opinion of Mayer, Brown & Platt with respect to federal tax
matters.*
23.1 Consents of Mayer, Brown & Platt (included in its
opinions filed as Exhibits 5.1 and 8.1).*
24.1 Powers of Attorney.*
99.1 Form of Sale and Servicing Agreement among the Registrant, the
Servicer and the Trust.*
99.2 Form of Purchase Agreement between Paragon and the Registrant.*
- - -----------------------------
* Previously filed.
ITEM 17. UNDERTAKINGS
(a) As to Rule 415 and Rule 430A:
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made of the securities registered hereby, a post-effective amendment
to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended (the "Securities Act");
(ii) to reflect in the prospectus any facts or events
arising after the effective date of this registration statement (or
the most recent post-effective amendment hereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in this registration statement; and
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in this
registration statement or any material change to such information in
this registration statement;
provided, however, that the undertakings set forth in clauses (i) and (ii)
above do not apply if the information required to be included in a
post-effective amendment by those clauses is contained in periodic reports
filed by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended, that are incorporated by
reference in this registration statement.
(2) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
II-2
<PAGE>
(3) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(4) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) As to documents subsequently filed that are incorporated by
reference:
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934, as amended, that is incorporated by
reference in this registration statement shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(c) As to Equity Offerings of Nonreporting Registrants:
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required
by the underwriter to permit prompt delivery to each purchaser.
(d) As to indemnification:
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described under Item
15 above, or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(e) As to qualification of Trust Indentures under Trust Indenture Act
of 1939 for delayed offerings:
The undersigned registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with
the rules and regulations prescribed by the Commission under Section
305(b)(2) of the Act.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all the requirements for filing on Form S-3 (and that the
security rating requirement will be met by the time of sale) and has duly
caused this Amendment No. 3 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Clayton, State
of Missouri, on the 3rd day of February, 1999.
PARAGON AUTO RECEIVABLES CORPORATION
By: /s/ Nancy C. Ferguson
------------------------------------
Nancy C. Ferguson
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
/s/ * President February 3, 1999
- - -------------------------- (principal executive
Dennis D. Lamont officer) and Director
/s/ * Treasurer February 3, 1999
- - -------------------------- (principal financial
James E. Stublarec and accounting officer)
/s/ Nancy C. Ferguson Secretary and Director February 3, 1999
- - -----------------------------
Nancy C. Ferguson
/s/ * Director February 3, 1999
- - ------------------------------
Douglas K. Johnson
* Signed by Nancy C. Ferguson as Attorney-in-Fact under Power of Attorney.
II-4
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
No. Description of Exhibit Page Number
- ------- ---------------------- ------------
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of Paragon Auto
Receivables Corporation*
3.2 By-Laws of Paragon Auto Receivables Corporation*
3.3 Form of Certificate of Trust for Paragon Auto Receivables
Trusts (included in Exhibit 4.2).*
4.1 Form of Indenture between the Trust and the Indenture
Trustee (including forms of
Notes).*
4.2 Form of Trust Agreement between the Registrant and
the Trustee (including forms of Certificates).*
4.3 Form of Pooling and Servicing Agreement, among
the Registrant, the Servicer and the Trustee
(including forms of Certificates).*
5.1 Opinion of Mayer, Brown & Platt with respect to legality.*
8.1 Opinion of Mayer, Brown & Platt with respect to
federal tax matters.*
23.1 Consents of Mayer, Brown & Platt (included in
its opinions filed as Exhibits 5.1 and 8.1).*
24.1 Powers of Attorney.*
99.1 Form of Sale and Servicing Agreement among the
Registrant, the Servicer and the Trust.*
99.2 Form of Purchase Agreement between Paragon and
the Registrant.*
- - -----------------------------
* Previously filed.
II-5
